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

Form 10-Q

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

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 20222023

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

FOR THE TRANSITION PERIOD FROM       TO

Commission File No. 001-33861

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

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

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

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

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

Title of each classTrading symbol(s)Name of each exchange on which registered
Common Stock, par value $0.01 per shareMPAAThe Nasdaq Global Select Market

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

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

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

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

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

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

There were 19,227,14619,595,355 shares of Common Stock outstanding at August 2, 2022.2023.

MOTORCAR PARTS OF AMERICA, INC.

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION 
 
Item 1. Financial Statements (unaudited)
4
 
Condensed Consolidated Balance Sheets
4
 
Condensed Consolidated Statements of Operations
5
 
Condensed Consolidated Statements of Comprehensive Income (Loss) Income
6
 
Condensed Consolidated Statements of Shareholders’ Equity
7
 
Condensed Consolidated Statements of Cash Flows
8
 
Notes to Condensed Consolidated Financial Statements
9
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
2124
 
Item 3. Quantitative and Qualitative Disclosures About Market Risk
27
30
 
Item 4. Controls and Procedures
27
31
   
PART II — OTHER INFORMATION 
 
Item 1. Legal Proceedings
29
32
 
Item 1A. Risk Factors
29
32
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
29
32
Item 3. Defaults Upon Senior Securities
32
 
Item 5. Other Information
29
32
 
Item 6. Exhibits
3033
 
SIGNATURES
3236

2
Table of Contents
MOTORCAR PARTS OF AMERICA, INC.

GLOSSARY

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

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

“Remanufactured Core” — The Used Core underlying an automobile part that has gone through the remanufacturing process and through that process has become part of a newly remanufactured automobile part. The remanufacturing process takes a Used Core, breaks it down into its component parts, replaces those components that cannot be reused and reassembles the salvageable components of the Used Core and additional new components into a remanufactured automobile part. Remanufactured Cores held for sale at our customer locations are included in long-term contract assets. The Remanufactured Core portion of stock adjustment returns are classified as contract assets until we physically receive them.

3
Table of Contents
PART I — FINANCIAL INFORMATION

Item 1.Financial Statements

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

 June 30, 2022  March 31, 2022  June 30, 2023  March 31, 2023 
ASSETS (Unaudited)     (Unaudited)    
Current assets:            
Cash and cash equivalents $9,217,000  $23,016,000  $10,887,000  $11,596,000 
Short-term investments  1,995,000   2,202,000   2,159,000   2,011,000 
Accounts receivable — net  73,030,000   85,075,000   146,645,000   119,868,000 
Inventory  405,205,000   385,504,000   364,187,000   356,254,000 
Contract assets  27,783,000   27,500,000   27,732,000   25,443,000 
Prepaid expenses and other current assets  11,705,000   13,688,000   20,566,000   22,306,000 
Total current assets  528,935,000   536,985,000   572,176,000   537,478,000 
Plant and equipment — net  49,384,000   51,062,000   44,244,000   46,052,000 
Operating lease assets  80,157,000   81,997,000   88,760,000   87,619,000 
Long-term deferred income taxes  27,046,000   26,982,000   32,417,000   32,625,000 
Long-term contract assets  306,953,000   310,255,000   314,463,000   318,381,000 
Goodwill and intangible assets — net  6,548,000   7,004,000   5,046,000   5,348,000 
Other assets  1,403,000   1,413,000   1,081,000   1,062,000 
TOTAL ASSETS $1,000,426,000  $1,015,698,000  $1,058,187,000  $1,028,565,000 
LIABILITIES AND SHAREHOLDERS�� EQUITY        
LIABILITIES AND SHAREHOLDERS’ EQUITY        
Current liabilities:                
Accounts payable and accrued liabilities $173,818,000  $168,435,000  $142,965,000  $141,766,000 
Customer finished goods returns accrual  28,793,000   38,086,000   33,378,000   37,984,000 
Contract liabilities  43,645,000   42,496,000   49,003,000   40,340,000 
Revolving loan  146,000,000   155,000,000   167,000,000   145,200,000 
Other current liabilities  11,279,000   11,930,000   5,170,000   4,871,000 
Operating lease liabilities  6,653,000   6,788,000   8,914,000   8,767,000 
Current portion of term loan  3,670,000   3,670,000   12,020,000   3,664,000 
Total current liabilities  413,858,000   426,405,000   418,450,000   382,592,000 
Term loan, less current portion  12,097,000   13,024,000   -   9,279,000 
Convertible notes, related party
  31,252,000
   30,994,000 
Long-term contract liabilities  173,045,000   172,764,000   194,708,000   193,606,000 
Long-term deferred income taxes  121,000   126,000   1,985,000   718,000 
Long-term operating lease liabilities  79,552,000   80,803,000   77,013,000   79,318,000 
Other liabilities  6,987,000   7,313,000   11,340,000   11,583,000 
Total liabilities  685,660,000   700,435,000   734,748,000   708,090,000 
Commitments and contingencies  
   
   
   
 
Shareholders’ equity:                
Preferred stock; par value $0.01 per share, 5,000,000 shares authorized; NaN issued
  0   0 
Series A junior participating preferred stock; par value $0.01 per share, 20,000 shares authorized; NaN issued
  0   0 
Common stock; par value $0.01 per share, 50,000,000 shares authorized; 19,214,978 and 19,104,751 shares issued and outstanding at June 30, 2022 and March 31, 2022, respectively
  192,000   191,000 
Preferred stock; par value $0.01 per share, 5,000,000 shares authorized; none issued
  -   - 
Series A junior participating preferred stock; par value $0.01 per share, 20,000 shares authorized; none issued
  -   - 
Common stock; par value $0.01 per share, 50,000,000 shares authorized; 19,599,145 and 19,494,615 shares issued and outstanding at June 30, 2023 and March 31, 2023, respectively
  196,000   195,000 
Additional paid-in capital  227,729,000   227,184,000   232,866,000   231,836,000 
Retained earnings  92,779,000   92,954,000   87,337,000   88,747,000 
Accumulated other comprehensive loss  (5,934,000)  (5,066,000)
Accumulated other comprehensive income (loss)  3,040,000   (303,000)
Total shareholders’ equity  314,766,000   315,263,000   323,439,000   320,475,000 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $1,000,426,000  $1,015,698,000  $1,058,187,000  $1,028,565,000 

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

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

 Three Months Ended 
 
Three Months Ended
June 30,
  June 30, 
 2022  2021  2023  2022 
            
Net sales $163,985,000  $149,034,000  $159,705,000  $163,985,000 
Cost of goods sold  133,683,000   125,463,000   133,138,000   133,683,000 
Gross profit  30,302,000   23,571,000   26,567,000   30,302,000 
Operating expenses:                
General and administrative  13,634,000   12,486,000   12,602,000   13,634,000 
Sales and marketing  5,542,000   5,368,000   5,419,000   5,542,000 
Research and development  3,113,000   2,501,000   2,375,000   3,113,000 
Foreign exchange impact of lease liabilities and forward contracts  678,000   (2,533,000)  (4,270,000)  678,000 
Total operating expenses  22,967,000   17,822,000   16,126,000   22,967,000 
Operating income  7,335,000   5,749,000   10,441,000   7,335,000 
Other expenses:
        
Interest expense, net  6,921,000   3,941,000   11,720,000   6,921,000 
Income before income tax expense
  414,000   1,808,000 
Income tax expense  589,000   947,000 
Net (loss) income
 $(175,000) $861,000 
Basic net (loss) income per share $(0.01) $0.05 
Diluted net (loss) income per share $(0.01) $0.04 
Change in fair value of compound net derivative liability
  140,000   - 
Total other expenses
  11,860,000   6,921,000 
(Loss) income before income tax (benefit) expense  (1,419,000)  414,000 
Income tax (benefit) expense  (9,000)  589,000 
Net loss $(1,410,000) $(175,000)
Basic net loss per share $(0.07) $(0.01)
Diluted net loss per share $(0.07) $(0.01)
Weighted average number of shares outstanding:                
Basic  19,123,354   19,054,481   19,508,626   19,123,354 
Diluted  19,123,354   19,659,057   19,508,626   19,123,354 

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

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

 
Three Months Ended
June 30,
 
  2022  2021 
       
Net (loss) income $(175,000) $861,000 
Other comprehensive (loss) income, net of tax:        
Foreign currency translation (loss) gain  (868,000)  1,833,000 
Total other comprehensive (loss) income, net of tax  (868,000)  1,833,000 
Comprehensive (loss) income $(1,043,000) $2,694,000 
  Three Months Ended 
 June 30, 
  2023  2022 
       
Net loss
 $(1,410,000) $(175,000)
Other comprehensive income (loss), net of tax:        
Foreign currency translation gain (loss)
  3,343,000   (868,000)
Total other comprehensive income (loss), net of tax  3,343,000   (868,000)
Comprehensive income (loss)
 $1,933,000  $(1,043,000)

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

6
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MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Shareholders’ Equity
(Unaudited)

 Common Stock              Common Stock             
 Shares  Amount  
Additional
Paid-in
Capital
  
Retained
Earnings
  
Accumulated
Other
Comprehensive
(Loss) Income
  Total  Shares  Amount  
Additional
Paid-in
Capital
  
Retained
Earnings
  
Accumulated
Other
Comprehensive
Income (Loss)
  Total 
                                    
Balance at March 31, 2022
  19,104,751  $191,000  $227,184,000  $92,954,000  $(5,066,000) $315,263,000 
Balance at March 31, 2023
  19,494,615  $195,000  $231,836,000  $88,747,000  $(303,000) $320,475,000 
Compensation recognized under employee stock plans  -   0   1,249,000   0   0   1,249,000   -   -   1,310,000   -   -   1,310,000 
Exercise of stock options, net of shares withheld for employee taxes  25,543   0   191,000   0   0   191,000 
Issuance of common stock upon vesting of RSUs, net of shares withheld for employee taxes  84,684   1,000   (895,000)  0   0   (894,000)  104,530   1,000   (280,000)  -   -   (279,000)
Foreign currency translation  -   0   0   0   (868,000)  (868,000)  -   -   -   -   3,343,000   3,343,000 
Net loss
  -   0   0   (175,000)  0   (175,000)  -   -   -   (1,410,000)  -   (1,410,000)
Balance at June 30, 2022
  19,214,978  $192,000  $227,729,000  $92,779,000  $(5,934,000) $314,766,000 
Balance at June 30, 2023
  19,599,145  $196,000  $232,866,000  $87,337,000  $3,040,000  $323,439,000 

 Common Stock              Common Stock             
 Shares  Amount  
Additional
Paid-in
Capital
  
Retained
Earnings
  
Accumulated
Other
Comprehensive
(Loss) Income
  Total  Shares  Amount  
Additional
Paid-in
Capital
  
Retained
Earnings
  
Accumulated
Other
Comprehensive
 Income (Loss)
  Total 
                                    
Balance at March 31,2021
  19,045,386  $190,000  $223,058,000  $85,593,000  $(7,696,000) $301,145,000 
Balance at March 31,2022
  19,104,751  $191,000  $227,184,000  $92,954,000  $(5,066,000) $315,263,000 
Compensation recognized under employee stock plans  -   0   1,576,000   0   0   1,576,000   -   -   1,249,000   -   -   1,249,000 
Exercise of stock options, net of shares withheld for employee taxes  19,837   0   354,000   0   0   354,000   25,543   -   191,000   -   -   191,000 
Issuance of common stock upon vesting of RSUs, net of shares withheld for employee taxes  35,869   1,000   (543,000)  0   0   (542,000)  84,684   1,000   (895,000)  -   -   (894,000)
Foreign currency translation  -   0   0   0   1,833,000   1,833,000   -   -   -   -   (868,000)  (868,000)
Net income
  -   0   0   861,000   0   861,000 
Balance at June 30, 2021
  19,101,092  $191,000  $224,445,000  $86,454,000  $(5,863,000) $305,227,000 
Net loss
  -   -   -   (175,000)  -   (175,000)
Balance at June 30, 2022
  19,214,978  $192,000  $227,729,000  $92,779,000  $(5,934,000) $314,766,000 

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

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

 Three Months Ended 
 
Three Months Ended
June 30,
  June 30, 
 2022  2021  2023  2022 
Cash flows from operating activities:            
Net (loss) income
 $(175,000) $861,000 
Adjustments to reconcile net (loss) income to net cash used in operating activities:        
Net loss $(1,410,000) $(175,000)
Adjustments to reconcile net loss to net cash used in operating activities:        
Depreciation and amortization  3,124,000   3,145,000   3,033,000   3,124,000 
Amortization of interest  306,000   414,000   713,000   306,000 
Accrued interest on convertible notes, related party
  800,000   - 
Amortization of core premiums paid to customers  2,863,000   2,531,000   2,490,000   2,863,000 
Amortization of finished goods premiums paid to customers  181,000   146,000   167,000   181,000 
Noncash lease expense  1,939,000   1,791,000   2,504,000   1,939,000 
Gain due to the change in the fair value of the contingent consideration  0   (60,000)
Foreign exchange impact of lease liabilities and forward contracts  678,000   (2,533,000)  (4,270,000)  678,000 
Loss (gain) on short-term investments  294,000   (5,000)
Change in fair value of compound net derivative liability
  140,000   - 
(Gain) loss on short-term investments  (121,000)  294,000 
Net provision for inventory reserves  3,942,000   3,141,000   3,366,000   3,942,000 
Net provision for customer payment discrepancies and credit losses  300,000   229,000   1,159,000   300,000 
Deferred income taxes  (62,000)  358,000   1,595,000   (62,000)
Share-based compensation expense  1,249,000   1,576,000   1,310,000   1,249,000 
Loss on disposal of plant and equipment  9,000   33,000   1,000   9,000 
Changes in operating assets and liabilities:                
Accounts receivable  11,427,000   9,020,000   (27,518,000)  11,427,000 
Inventory  (24,252,000)  (20,625,000)  (10,782,000)  (24,252,000)
Prepaid expenses and other current assets  1,122,000   281,000   2,391,000   1,122,000 
Other assets  6,000   297,000   16,000   6,000 
Accounts payable and accrued liabilities  5,898,000   (10,183,000)  927,000   5,898,000 
Customer finished goods returns accrual  (9,289,000)  3,698,000   (4,679,000)  (9,289,000)
Contract assets, net  (37,000)  (24,857,000)
Contract liabilities, net  1,384,000   27,880,000 
Contract assets
  (792,000)  (37,000)
Contract liabilities
  9,320,000   1,384,000 
Operating lease liabilities  (1,446,000)  (1,259,000)  (1,863,000)  (1,446,000)
Other liabilities  (443,000)  (618,000)  1,033,000   (443,000)
Net cash used in operating activities  (982,000)  (4,739,000)  (20,470,000)  (982,000)
Cash flows from investing activities:                
Purchase of plant and equipment  (1,375,000)  (1,922,000)  (40,000)  (1,375,000)
Purchase of short-term investments  (86,000)  (167,000)  (27,000)  (86,000)
Net cash used in investing activities  (1,461,000)  (2,089,000)  (67,000)  (1,461,000)
Cash flows from financing activities:                
Borrowings under revolving loan  13,000,000   32,000,000   26,000,000   13,000,000 
Repayments of revolving loan  (22,000,000)  (13,000,000)  (4,200,000)  (22,000,000)
Repayments of term loan  (938,000)  (938,000)  (938,000)  (938,000)
Payments for debt issuance costs  (21,000)  (1,102,000)  (418,000)  (21,000)
Payments on finance lease obligations  (604,000)  (678,000)  (492,000)  (604,000)
Exercise of stock options  191,000   354,000 
Exercise of stock options, net of cash used to pay employee taxes
  -   191,000 
Cash used to net share settle equity awards  (894,000)  (542,000)  (279,000)  (894,000)
Net cash (used in) provided by financing activities  (11,266,000)  16,094,000 
Net cash provided by (used in) financing activities  19,673,000   (11,266,000)
Effect of exchange rate changes on cash and cash equivalents  (90,000)  94,000   155,000   (90,000)
Net (decrease) increase in cash and cash equivalents  (13,799,000)  9,360,000 
Net decrease in cash and cash equivalents  (709,000)  (13,799,000)
Cash and cash equivalents — Beginning of period  23,016,000   15,523,000   11,596,000   23,016,000 
Cash and cash equivalents — End of period $9,217,000  $24,883,000  $10,887,000  $9,217,000 
Supplemental disclosures of cash flow information:                
Cash paid for interest, net $6,548,000  $3,521,000  $10,120,000  $6,548,000 
Cash paid for income taxes, net of refunds  712,000   1,550,000   645,000   712,000 
Cash paid for operating leases  2,647,000   2,472,000   3,081,000   2,647,000 
Cash paid for finance leases  672,000   775,000   554,000   672,000 
Plant and equipment acquired under finance leases  75,000   230,000   31,000   75,000 
Assets acquired under operating leases  144,000   15,718,000   -   144,000 
Non-cash capital expenditures  401,000   206,000   -   401,000 
Debt issuance costs included in accounts payable and accrued liabilities
  187,000   - 

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

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MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 20222023
(Unaudited)

1. Company Background and Organization

Motorcar Parts of America, Inc. and its subsidiaries (the “Company”, or “MPA”) is a leading supplier of automotive aftermarket non-discretionary replacement parts, and test solutions and diagnostic equipment. These replacement parts are primarily sold to automotive retail chain stores and warehouse distributors throughout North America and to major automobile manufacturers for both their aftermarket programs and warranty replacement programs (“OES”). The Company’s test solutions and diagnostic equipment primarily serves the global automotive component and powertrain testing market. The Company’s products include (i) light duty and heavy duty rotating electrical products such as alternators and starters, (ii) wheel hub assemblies and bearings, (iii) brake-related products, which include brake calipers, brake boosters, brake rotors, brake pads, brake shoes, and brake master cylinders, and (iv) other products, which include (a) turbochargers and (b) test solutions and diagnostic equipment usedincluding: (i) applications for electric vehicle powertrain development and manufacturingcombustion engine vehicles, including electric motor test systems, e-axle test systems, advanced power emulators, charging unit test systems, test systemsbench top testers for alternators and starters, belt starter generators, bench-top testers,(ii) equipment for the pre- and specialized test servicespost-production of electric vehicles, and (iii) software emulation of power systems applications for the electrification of all forms of transportation (including automobiles, trucks, the emerging electrification of systems within the aerospace industry, and electric vehicle inverters.charging stations).

Pursuant to the guidance provided under the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) for segment reporting, the Company has identified its chief operating decision maker (“CODM”), 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 its business comprises 3 separate operating segments. The operating segments meet all the criteria to be aggregated and are presented as such.
2. Basis of Presentation

Impact of the Novel Coronavirus (“COVID-19”)

The outbreak of the COVID-19 pandemic continues to adversely impact the U.S. and global economies – creating uncertainty regarding the potential effects on the Company’s employees, supply chain, operations, and customer demand. The COVID-19 pandemic could impact the Company’s operations and the operations of its customers, suppliers, and vendors because of quarantines, facility closures, travel, and logistics restrictions. The extent to which the COVID-19 pandemic impacts the Company will depend on numerous factors and future developments, which are highly uncertain and cannot be predicted, including, but not limited to: (i) the severity of the virus, (ii) the occurrence and duration of additional spikes in infections, (iii) the effects of the pandemic on customers, suppliers, and vendors, (iv) the remedial actions and stimulus measures adopted by local, state and federal governments, (v) the availability and acceptance of vaccines, and (vi) the extent to which normal economic and operating conditions can resume. Even after the COVID-19 pandemic has subsided, the Company may continue to experience adverse impacts to its business because of an economic recession or depression that has occurred or may occur in the future.

2. Basis of Presentation and New Accounting Pronouncements

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended June 30, 20222023 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2023.2024. This report should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the fiscal year ended March 31, 2022,2023, which are included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on June 14, 2022.2023.

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The accompanying condensed consolidated financial statements have been prepared on a consistent basis with, and there have been no material changes to the accounting policies described in Note 2,, Summary of Significant Accounting Policies, to the consolidated financial statements that are presented in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2022.2023.

3. Accounts Receivable — Net

The Company has trade accounts receivable that result from the sale of goods and services. Accounts receivable — net includes offset accounts related to allowances for credit losses, customer payment discrepancies, and returned goods authorizations (“RGAs”) issued for in-transit unit returns. The Company believes its credit risk with respect to trade accounts receivable is limited due to its credit evaluation process and the long-term nature of its relationships with its largest customers. The Company utilizes a historical loss rate method, adjusted for any changes in economic conditions or risk characteristics, to estimate its expected credit losses each period. When developing an estimate of expected credit losses, the Company considers all available relevant information regarding the collectability of cash flows, including historical information, current conditions, and reasonable and supportable forecasts of future economic conditions over the contractual life of the receivable. The historical loss rate method considers past write-offs of trade accounts receivable over a period commensurate with the initial term of the Company’s contracts with its customers. The Company recognizes the allowance for credit losses at inception and reassesses quarterly based on management’s expectation of the asset’s collectability. The Company’s accounts receivable are short-term in nature and written off only when all collection attempts have failed. The Company uses receivable discount programs with certain customers and their respective banks (see Note 10).

Accounts receivable — net is comprised of the following:

  June 30, 2022  March 31, 2022 
Accounts receivable — trade $94,087,000  $98,734,000 
Allowance for credit losses  (231,000)  (375,000)
Customer payment discrepancies  (1,418,000)  (1,375,000)
Customer returns RGA issued  (19,408,000)  (11,909,000)
Total accounts receivable — net $73,030,000  $85,075,000 

The following table provides a roll-forward of the allowance for credit losses that is deducted from accounts receivable to present the net amount expected to be collected.
  June 30, 2023  March 31, 2023 
Accounts receivable — trade $165,486,000  $136,076,000 
Allowance for credit losses  (303,000)  (339,000)
Customer payment discrepancies  (2,076,000)  (1,634,000)
Customer returns RGA issued  (16,462,000)  (14,235,000)
Total accounts receivable — net $146,645,000  $119,868,000 

 
Three Months Ended
June 30,
 
  2022  2021 
Balance at beginning of period $375,000  $348,000 
Provision for expected credit losses  12,000   (36,000)
Recoveries  0   0 
Amounts written off charged against the allowance  (156,000)  (39,000)
Balance at end of period $231,000  $273,000 

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4. Inventory

Inventory is comprised of the following:

  June 30, 2022  March 31, 2022 
Inventory      
Raw materials $146,775,000  $150,414,000 
Work-in-process  6,357,000   6,880,000 
Finished goods  248,332,000   226,729,000 
   401,464,000   384,023,000 
Less allowance for excess and obsolete inventory  (12,704,000)  (13,520,000)
Inventory — net  388,760,000   370,503,000 
Inventory unreturned  16,445,000   15,001,000 
Total inventory $405,205,000  $385,504,000 

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

5. Contract Assets

During the three months ended June 30, 20222023 and 2021,2022, the Company reduced the carrying value of Remanufactured Cores held at customers’ locations by $572,000$778,000 and $984,000,$572,000, respectively.


Contract assets are comprised of the following:

  June 30, 2022  March 31, 2022 
Short-term contract assets      
Cores expected to be returned by customers $16,658,000  $15,778,000 
Upfront payments to customers  460,000   517,000 
Finished goods premiums paid to customers  573,000   584,000 
Core premiums paid to customers  10,092,000   10,621,000 
Total short-term contract assets $27,783,000  $27,500,000 
         
Remanufactured cores held at customers’ locations $257,379,000  $258,376,000 
Upfront payments to customers  122,000   210,000 
Finished goods premiums paid to customers  2,685,000   2,806,000 
Core premiums paid to customers  41,198,000   43,294,000 
Long-term core inventory deposits  5,569,000   5,569,000 
 Total long-term contract assets $306,953,000  $310,255,000 

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

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6. Significant Customer and Other Information

Significant Customer Concentrations

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

  
Three Months Ended
June 30,
 
  2022  2021 
Net sales      
Customer A  37%  34%
Customer B  25%  20%
Customer C  20%  31%

  Three Months Ended 
  June 30, 
  2023  2022 
Net sales      
Customer A  34%  37%
Customer C
  28%  20%
Customer B
  20%  25%
Customer D
  5%  4%
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TableRevenues for Customers A through C were derived from the Hard Parts segment and Test Solutions and Diagnostic Equipment segment. Revenues for Customer D were derived from the Hard Parts segment. See Note 17 for a discussion of Contentsthe Company’s segments.

The largest customers accounted for the following percentage of accounts receivable – trade:

  June 30, 2022  March 31,2022 
Accounts receivable - trade      
Customer A  43%  42%
Customer B  22%  21%
Customer C  0%  9%
  June 30, 2023  March 31, 2023 
Accounts receivable - trade      
Customer A  34%  33%
Customer C
  30%  21%
Customer B
  15%  18%
Customer D  8%  12%

Geographic and Product Information

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

  
Three Months Ended
June 30,
 
  2022  2021 
Product line      
Rotating electrical products  67%  67%
Wheel hub products  12%  14%
Brake-related products  17%  16%
Other products  4%  3%
   100%  100%
  Three Months Ended 
  June 30, 
  2023  2022 
Product line      
Rotating electrical products  64%  67%
Brake-related products  22%  17%
Wheel hub products  11%  12%
Other products  3%  4%
 
  100%  100%

Significant Supplier Concentrations

The Company had no suppliers that accounted for more than 10% of inventory purchases for the three months ended June 30, 20222023 and 2021, respectively.2022.

7. Debt


The Company is party to a $268,620,000 senior secured financing, (as amended from time to time, the “Credit Facility”) with a syndicate of lenders and PNC Bank, National Association, as administrative agent,, consisting of (i) a $238,620,000 revolving loan facility subject to borrowing base restrictions, a $24,000,000 sublimit for borrowings by Canadian borrowers, and a $20,000,000 sublimit for letters of credit (the “Revolving Facility”), subject to certain restrictions, and (ii) a $30,000,000 term loan facility (the “Term Loans”). The loans under the Credit Facility mature on May 28, 2026. The Credit Facility currently permits the payment of up to $29,043,000 of dividends2026 and share repurchases for fiscal year 2023, subject to pro forma compliance with financial covenants. In connection with the Credit Facility, the lenders have a security interest in substantially all of the assets of the Company.

The Term Loans require quarterly principal payments of $937,500. The Credit Facility bears interest at rates equal to either LIBOR plus a margin of 2.25%, 2.50% or 2.75% or a reference rate plus a margin of 1.25%, 1.50% or 1.75%, in each case depending on the senior leverage ratio as of the applicable measurement date. There is also a facility fee of 0.375% to 0.50%, depending on the senior leverage ratio as of the applicable measurement date. The interest rate on the Company’s Term Loans and Revolving Facility was 3.82%8.52% and 4.20%8.46% respectively, at June 30, 2022,2023, and 2.99% 8.02% and 3.13%8.13% respectively, at March 31, 20222023.

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On August 3, 2023, the Company entered into a seventh amendment to the Credit Facility, which among other things, (i) permits the Company to repay its outstanding balance of Term Loans, (ii) permits the exclusion of quarterly principal payments of Term Loans from the fixed charge coverage ratio (including retrospectively for the prior periods) for all quarters beginning June 30, 2023, (iii) resets the fixed charge coverage ratio financial covenant level for the quarters ending September 30, 2023 and December 31, 2023, (iv) eliminates the senior leverage ratio financial covenant effective with the quarter ended June 30, 2023, (v) extends the minimum undrawn availability financial covenant through the delivery of the June 30, 2024 compliance certificate, and (vi) excludes the amount of all amendment fees and expenses incurred in connection with this amendment as well as prior unamortized fees associated with the Term Loans from bank EBITDA and the fixed charge coverage ratio financial covenant. The modifications to the financial covenants were effective as of June 30, 2023.



The Credit Facility, among other things, requires the Company to maintain certain financial covenants, including a maximum senior leverage ratio and a minimum fixed charge coverage ratio. The Company was in compliance with all amended financial covenants at as of June 30, 2022.

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.2023.

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The following summarizes information about the Term Loans:

 June 30, 2022  March 31, 2022  June 30, 2023  March 31, 2023 
Principal amount of Term Loans $15,937,000  $16,875,000  $12,187,000  $13,125,000 
Unamortized financing fees  (170,000)  (181,000)  (167,000)  (182,000)
Net carrying amount of Term Loans  15,767,000   16,694,000   12,020,000   12,943,000 
Less current portion of Term Loans  (3,670,000)  (3,670,000)  (12,020,000)  (3,664,000)
Long-term portion of Term Loans $12,097,000  $13,024,000  $-  $9,279,000 

Future repayments

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

Year Ending March 31,   
2023 - remaining nine months
 $2,812,000 
2024  3,750,000 
2025  3,750,000 
2026  3,750,000 
2027  1,875,000 
Total payments $15,937,000 


The Company had $146,000,000$167,000,000 and $155,000,000$145,200,000 outstanding under the Revolving Facility at June 30, 20222023 and March 31, 2022,2023, respectively. In addition, $6,370,000 was outstanding for letters of credit at June 30, 2022.2023. At June 30, 2022,2023, after certain contractual adjustments, $86,250,000$65,250,000 was available under the Revolving Facility.


Convertible Notes


On March 31, 2023, the Company entered into a note purchase agreement, (the “Note Purchase Agreement”) with Bison Capital Partners VI, L.P. and Bison Capital Partners VI-A, L.P. (collectively, the “Purchasers”) and Bison Capital Partners VI, L.P., as the purchaser representative (the “Purchaser Representative”) for the issuance and sale of $32,000,000 in aggregate principal amount of convertible notes due in 2029 (the “Convertible Notes”), which was used for general corporate purposes. The Convertible Notes bear interest at a rate of 10.0% per annum, compounded annually, and payable (i) in kind or (ii) in cash, annually in arrears on April 1 of each year, commencing on April 1, 2024. The Convertible Notes have an initial conversion price of approximately $15.00 per share of common stock (“Conversion Option”). Unless and until the Company delivers a redemption notice, the Purchasers of the Convertible Notes may convert their Convertible Notes at any time at their option. Upon conversion, the Convertible Notes will be settled in shares of the Company’s common stock. Except in the case of the occurrence of a fundamental transaction, as defined in the form of convertible promissory note, the Company may not redeem the Convertible Notes prior to March 31, 2026. After March 31, 2026, the Company may redeem all or part of the Convertible Notes for a cash purchase (the “Company Redemption”) price.



On June 8, 2023, the Company entered into the first amendment to the Note Purchase Agreement, which among other things, removed a provision that specified the Purchasers would be entitled to receive a dividend or distribution payable in certain circumstances. This amendment was effective as of March 31, 2023.


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On August 1, 2023, the Company entered into the second amendment to the Note Purchase Agreement, which amended the definition of “Permitted Restricted Payments” to permit the prepayment of the Company’s Term Loans.



The Company’s Convertible Notes are comprised of the following:



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



In connection with the Note Purchase Agreement, the Company entered into common stock warrants (the “Warrants”) with the Purchasers, which mature on March 30, 2029. The fair value of the Warrants, using Level 3 inputs and the Monte Carlo simulation model, was zero at June 30, 2023 and March 31, 2023.



The Company Redemption option has been combined with the Conversion Option as a compound net derivative liability (the “Compound Net Derivative Liability”). The Compound Net Derivative Liability has been recorded within convertible note, related party in the condensed consolidated balance sheets at June 30, 2023 and March 31, 2023. The fair value of the Conversion Option and the Company Redemption option using Level 3 inputs and the Monte Carlo simulation model was a liability of $10,800,000 and $10,400,000, and an asset of $2,230,000 and $1,970,000 at June 30, 2023 and March 31, 2023, respectively. During the three months ended June 30, 2023, the Company recorded $140,000 as the change in fair value of the Compound Net Derivative Liability in the condensed consolidated statement of operations and condensed consolidated statement of cash flows.



The Convertible Notes also contain additional features, such as, default interest and options related to a fundamental transaction, which were not separately accounted for as the value of such features were not material at June 30, 2023 and March 31, 2023.



Interest expense related to the Convertible Notes is as follows:


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



There are no future payments required under the Convertible Notes prior to their maturity, therefore, the principal amount of the Convertible Notes plus interest payable in kind, assuming no early redemption or conversion has occurred, of $56,704,000 would be paid on March 30, 2029.

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8. Contract Liabilities

Contract liabilities are comprised of the following:

  June 30, 2022  March 31, 2022 
Short-term contract liabilities 
  

Customer core returns accruals $17,533,000  $12,322,000 
Customer allowances earned  18,698,000   22,018,000 
Customer deposits  2,507,000   3,306,000 
Finished goods liabilities  1,582,000   1,537,000 
Core bank liability  1,647,000   1,634,000 
Accrued core payment
  1,678,000   1,679,000 
      Total short-term contract liabilities $43,645,000  $42,496,000 
         
Long-term contract liabilities        
Customer core returns accruals $156,153,000  $154,940,000 
Customer allowances earned  0   41,000 
Finished goods liabilities  1,202,000   1,588,000 
Core bank liability  14,851,000   15,267,000 
Accrued core payment
  839,000   928,000 
      Total long-term contract liabilities $173,045,000  $172,764,000 

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

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

9. Leases

The Company leases various facilities in North America and Asia under operating leases expiring through August 2033.2033. The Company has material nonfunctional currency leases that could have a material impact on the Company’s condensed consolidated statements of operations. As required for other monetary liabilities, lessees remeasure foreign currency-denominated lease liabilities using the exchange rate at each reporting date, but the lease assets are nonmonetary assets measured at historical rates and are not affected by subsequent changes in the exchange rates.

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In connection with the remeasurement of these leases, the Company recorded gainsa gain of $20,000$3,770,000 and $2,795,000$20,000 during the three months ended June 30, 2023 and 2022, and 2021, respectively.respectively. These amounts are included in “foreignforeign exchange impact of lease liabilities and forward contracts”contracts in the condensed consolidated statements of operations.

Balance sheet information for leases is as follows:

Leases Classification June 30, 2022  March 31, 2022 
Assets:        
Operating 
Operating lease assets
 $80,157,000  $81,997,000 
Finance 
Plant and equipment
  7,027,000   7,470,000 
Total leased assets   $87,184,000  $89,467,000 
           
Liabilities:          
Current          
Operating 
Operating lease liabilities
 $6,653,000  $6,788,000 
Finance 
Other current liabilities
  2,185,000   2,330,000 
Long-term          
Operating 
Long-term operating lease liabilities
  79,552,000   80,803,000 
Finance 
Other liabilities
  3,035,000   3,425,000 
Total lease liabilities   $91,425,000  $93,346,000 
Leases Classification June 30, 2023  March 31, 2023 
Assets:        
Operating 
Operating lease assets
 $88,760,000  $87,619,000 
Finance 
Plant and equipment
  5,001,000   5,549,000 
Total leased assets   $93,761,000  $93,168,000 
           
Liabilities:          
Current          
Operating 
Operating lease liabilities
 $8,914,000  $8,767,000 
Finance 
Other current liabilities
  1,802,000   1,851,000 
Long-term          
Operating 
Long-term operating lease liabilities
  77,013,000   79,318,000 
Finance 
Other liabilities
  2,333,000   2,742,000 
Total lease liabilities   $90,062,000  $92,678,000 

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

  
Three Months Ended
June 30,
 
  2022  2021 
Lease cost      
Operating lease cost $3,165,000  $3,042,000 
Short-term lease cost  454,000   376,000 
Variable lease cost  185,000   281,000 
Finance lease cost:        
Amortization of finance lease assets  539,000   499,000 
Interest on finance lease liabilities  68,000   97,000 
Total lease cost $4,411,000  $4,295,000 
  Three Months Ended 
  June 30, 
  2023  2022 
Lease cost      
Operating lease cost $3,742,000  $3,165,000 
Short-term lease cost  293,000   454,000 
Variable lease cost  186,000   185,000 
Finance lease cost:        
Amortization of finance lease assets  403,000   539,000 
Interest on finance lease liabilities  62,000   68,000 
Total lease cost $4,686,000  $4,411,000 

Maturities of lease commitments at June 30, 20222023 by fiscal year were as follows:

Maturity of lease liabilities Operating Leases  Finance Leases  Total 
2023 - remaining nine months
 $8,804,000  $1,884,000  $10,688,000 
2024  10,073,000   1,762,000   11,835,000 
2025  10,143,000   1,263,000   11,406,000 
2026  10,358,000   570,000   10,928,000 
2027  10,496,000   106,000   10,602,000 
Thereafter  64,621,000   5,000   64,626,000 
Total lease payments  114,495,000   5,590,000   120,085,000 
Less amount representing interest  (28,290,000)  (370,000)  (28,660,000)
Present value of lease liabilities $86,205,000  $5,220,000  $91,425,000 

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

  June 30, 2022  March 31, 2022 
Lease term and discount rate      
Weighted-average remaining lease term (years):      
Finance leases  2.8   2.9 
Operating leases  10.2   10.4 
Weighted-average discount rate:        
Finance leases  5.1%  5.1%
Operating leases  5.7%  5.7%

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

10. Accounts Receivable Discount Programs

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

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The following is a summary of accounts receivable discount programs:

  
Three Months Ended
June 30,
 
  2022  2021 
Receivables discounted $142,624,000  $146,669,000 
Weighted average days  327   329 
Annualized weighted average discount rate  3.7%  1.8%
Amount of discount recognized as interest expense $4,874,000  $2,473,000 

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

11. Net (Loss) IncomeLoss per Share

Basic net (loss) incomeloss per share is computed by dividing net (loss) incomeloss by the weighted average number of shares of common stock outstanding during the period. Diluted net (loss) incomeloss per share includes the effect, if any, from the potential exercise or conversion of securities, such as stock options, Warrants, and Convertible Notes (as defined in Note 7), which would result in the issuance of incremental shares of common stock to the extent such impact is not anti-dilutive.

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

  
Three Months Ended
June 30,
 
  2022  2021 
Net (loss) income
 $(175,000) $861,000 
Basic shares  19,123,354   19,054,481 
Effect of potentially dilutive securities  0   604,576 
Diluted shares  19,123,354   19,659,057 
Net (loss) income per share:        
Basic net (loss) income per share $(0.01) $0.05 
Diluted net (loss) income per share $(0.01) $0.04 
  Three Months Ended 
  June 30, 
  2023  2022 
Net loss
 $(1,410,000) $(175,000)
Basic shares  19,508,626   19,123,354 
Effect of potentially dilutive securities  -   - 
Diluted shares  19,508,626   19,123,354 
Net loss per share:        
Basic net loss per share $(0.07) $(0.01)
Diluted net loss per share $(0.07) $(0.01)


Potential common shares that would have the effect of increasing diluted net income per share or decreasing diluted net loss per share are considered to be anti-dilutive and as such, these shares are not included in calculating diluted net (loss) incomeloss per share. For the three months ended June 30, 20222023 and 2021,2022, there were 2,301,9012,067,168 and 634,832,2,301,901, respectively, of potential common shares not included in the calculation of diluted net (loss) incomeloss per share because their effect was anti-dilutive. In addition, for the three months ended June 30, 2023, there were 2,186,667 of potential common shares not included in the calculation of diluted loss per share under the “if-converted” method for the Convertible Notes because their effect was anti-dilutive. The potential common shares related to the Warrants issued in connection with the Convertible Notes (see Note 7) are anti-dilutive until they become exercisable and as of June 30, 2023, the Warrants were not exercisable.

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12. Income Taxes

The Company recorded an income tax benefit of $9,000, or an effective tax rate of 0.6%, and income tax expense of $589,000, or an effective tax rate of 142.3%, and $947,000, or an effective tax rate of 52.4%, for the three months ended June 30, 20222023 and 2021,2022, respectively. Effective tax rates are based on current annual projections and any changes in future periods could result in an effective tax rate that is materially different from the current estimate. The effective tax rate for the three months ended June 30, 2022,2023, was primarily impacted by (i) foreign income taxed at rates that are different from the federal statutory rate, (ii) non-deductible executive compensation under Internal Revenue Code Section 162(m), and (iii) specific jurisdictions that the Company does not expect to recognize the benefit of losses, (ii) foreign income taxed at rates that are different from the federal statutory rate, and (iii) non-deductible executive compensation under Internal Revenue Code Section 162(m).losses.

The Company and its subsidiaries file income tax returns in the U.S. federal, various state, and foreign jurisdictions with varying statutes of limitations. At June 30, 2022,2023, the Company is not under any examination in any material jurisdiction, and remainremains subject to examination from the years ended March 31, 2017.2018. The Company believes no significant changes in the unrecognized tax benefits will occur within the next 12 months.

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13. Financial Risk Management and Derivatives

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

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

The Company had forward foreign currency exchange contracts with a U.S. dollar equivalent notional value of $46,450,00050,125,000 and $44,968,00048,486,000 at June 30, 20222023 and March 31, 2022,2023, respectively. These contracts generally have a term of one year or less, at rates agreed at the inception of the contracts. The counterparty to thisthese derivative transactiontransactions is a major financial institution with investment grade credit rating; however, the Company is exposed to credit risk with this institution. The credit risk is limited to the potential unrealized gains (which offset currency fluctuations adverse to the Company) in any such contract should this counterparty fail to perform as contracted. Any changes in the fair values of forward foreign currency exchange contracts are included in “foreignforeign exchange impact of lease liabilities and forward contracts”contracts in the condensed consolidated statements of operations.

The following shows the effect of derivative instruments on the condensed consolidated statements of operations:

 Loss Recognized as Foreign Exchange Impact of Lease Liabilities and Forward Contracts  Gain (Loss) Recognized as Foreign Exchange Impact of Lease Liabilities and Forward Contracts 
 Three Months Ended  Three Months Ended 
Derivatives Not Designated as June 30,  June 30, 
Hedging Instruments 2022  2021  2023  2022 
Forward foreign currency exchange contracts $(698,000) $(262,000) $500,000 $(698,000)

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The fair value of the forward foreign currency exchange contracts of $415,000$4,389,000 and $1,113,000$3,889,000 is included in prepaid expenses and other current assets in the condensed consolidated balance sheets at June 30, 20222023 and March 31, 2022,2023, respectively. The changes in the fair values of forward foreign currency exchange contracts are included in “foreignforeign exchange impact of lease liabilities and forward contracts”contracts in the condensed consolidated statements of cash flows for the three months ended June 30, 20222023 and 2021.2022.

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14. Fair Value Measurements

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

 June 30, 2023  March 31, 2023 
 June 30, 2022  March 31, 2022     Fair Value Measurements     Fair Value Measurements 
    
Fair Value Measurements
Using Inputs Considered as
     
Fair Value Measurements
Using Inputs Considered as
     Using Inputs Considered as     Using Inputs Considered as 
 Fair Value  Level 1  Level 2  Level 3  Fair Value  Level 1  Level 2  Level 3  Fair Value  Level 1  Level 2  Level 3  Fair Value  Level 1  Level 2  Level 3 
Assets                                                
Short-term investments                                                
Mutual funds $1,995,000  $1,995,000  $0  $0  $2,202,000  $2,202,000  $0  $0  $2,159,000  $2,159,000  $-  $-  $2,011,000  $2,011,000  $-  $- 
Prepaid expenses and other current assets                                                                
Forward foreign currency exchange contracts  415,000   0   415,000   0   1,113,000   0   1,113,000   0   4,389,000   -   4,389,000   -   3,889,000   -   3,889,000   - 
                                                                
Liabilities                                                                
Other current liabilities                                                                
Deferred compensation  1,995,000   1,995,000   0   0   2,202,000   2,202,000   0   0   2,159,000   2,159,000   -   -   2,011,000   2,011,000   -   - 
Convertible notes, related party
                                
Compound Net Derivative Liability
  8,570,000   -   -   8,570,000   8,430,000   -   -   8,430,000 

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 (See Note 13).

Compound Net Derivative Liability

The Company estimates the fair value of the Compound Net Derivative Liability (see Note 7) using Level 3 inputs and the Monte Carlo simulation model at the balance sheet date. The Monte Carlo simulation model requires the input of subjective assumptions including the expected volatility of the underlying stock. These subjective assumptions are based on both historical and other information. Changes in the values assumed and used in the model can materially affect the estimate of fair value. This amount is recorded within convertible notes, related party in the condensed consolidated balance sheets at June 30, 2023 and March 31, 2023. Any changes in the fair value of the Compound Net Derivative Liability are recorded in change in fair value of compound net derivative liability in the condensed consolidated statements of operations.

The following assumptions were used to determine the fair value of the Compound Net Derivative Liability:

  June 30, 2023  March 31, 2023 
Risk free interest rate  
4.09
%
  
3.64
%
Cost of equity  
22.30
%
  
21.80
%
Weighted average cost of capital  14.70%  14.60%
Expected volatility of MPA common stock  50.00%  50.00%
EBITDA volatility  40.00%  35.00%

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

  Three Months Ended 
  June 30, 

 
2023
 
Beginning balance $
8,430,000
 
Changes in fair value of Compound Net Derivative Liability included in earnings  
140,000
 
Ending balance $
8,570,000
 

During the three months ended June 30, 2023, the Company had no significant measurements of assets or liabilities at fair value on a nonrecurring basis subsequent to their initial recognition.

The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their fair value due to the short-term nature of these instruments. The carrying amounts of the revolving loan, term loan and other long-term liabilities approximate their fair value based on the variable nature of interest rates and current rates for instruments with similar characteristics. At June 30, 2023 and March 31, 2023, the net carrying amount of the Convertible Notes was $31,252,000 and $30,994,000, respectively, with unamortized debt discounts and debt issuance costs of $9,318,000 and $9,436,000, respectively, and Compound Net Derivative Liability of $8,570,000 and $8,430,000, respectively. The estimated fair value of the Company’s Convertible Notes was $32,752,000 using Level 3 inputs at June 30, 2023. The net carrying amount of the Convertible Notes approximated their fair value at March 31, 2023, as they were issued on March 31, 2023.

15. Share-based Payments

Stock Options

During the three months ended June 30, 2023 and 2022, and 2021, 0no options to purchase shares of the Company’s common stock were granted.

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The following is a summary of stock option transactions:

 
Number of
Shares
  
Weighted Average
Exercise Price
  Number of  Weighted Average 
Outstanding at March 31, 2022  1,695,499  $17.53 
 Shares  Exercise Price 
Outstanding at March 31, 2023  1,232,745  $20.20 
Granted  0  $0   -  $- 
Exercised  (25,543) $7.46   - $- 
Forfeited/Cancelled
  (60,723) $15.73   (97,683) $19.34 
Expired  (3,000) $9.85   - $- 
Outstanding at June 30, 2022  1,606,233  $17.76 
Outstanding at June 30, 2023  1,135,062  $20.28 

At June 30, 2022,2023, options to purchase 197,0321,009 shares of common stock were unvested at a weighted average exercise price of $17.25.$17.38.

At June 30, 2022,2023, there was $666,000$1,000 of total unrecognized compensation expense related to unvested stock option awards, which will be recognized over the weighted average remaining vesting period of approximately one year.two months.

Restricted Stock Units and Restricted Stock Awards (collectively “RSUs”)

During the three months ended June 30, 2023, no RSUs were granted by the Company. During the three months ended June 30, 2022, and 2021, the Company granted (i) performance-based restricted stock awards which had a threshold performance level of 33,333 shares, a target performance level of 66,667 shares, and a maximum performance level of 100,000 shares at the grant date for both periods and (ii) 176,590 and 118,673 of time-based vesting restricted stock units, respectively, based on the closing market price on the grant date.

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The following is a summary of non-vested RSUs:

 
Number of
Shares
  
Weighted Average
Grant Date Fair
Value
  
Number of
Shares
  
Weighted Average
Grant Date Fair
Value
 
Outstanding at March 31, 2022  399,063  $19.98 
Outstanding at March 31, 2023  429,354  $15.07 
Granted  276,590  $13.14   -  $- 
Vested  (149,313) $20.63   (147,215) $15.66 
Forfeited/Cancelled
  (41,293) $20.72   (76,585) $13.23 
Outstanding at June 30, 2022  485,047  $15.82 
Outstanding at June 30, 2023  205,554  $15.33 

At June 30, 2022,2023, there was $5,818,000$2,484,000 of unrecognized compensation expense related to RSUs, which will be recognized over the weighted average remaining vesting period of approximately 2.01.5 years. The Company’s unrecognized compensation expense includes restricted stock awards at target performance level.

Performance Stock Units (“PSUs”)

During the three months ended June 30, 2022 and 2021,2023, the Company granted 126,028533,856 PSUs, which vest, subject to continued employment, as follows: (i) if the stock price is greater than or equal to $10.00 per share, then 1/3 of the grant will vest, (ii) if the stock price is greater than or equal to $15.00 per share then the next 1/3 of the grant will vest, and 84,593(iii) if the stock price is greater than or equal to $20.00 per share then the final 1/3 of the grant will vest. Recipients are eligible to vest in between 50% and 150% of the third tranche by achieving a stock price between $17.50 and $25.00 per share (each stock price target must be met for thirty consecutive trading days). The Company calculated the fair value of these PSUs individually for each tranche using the Monte Carlo Simulation Model at the grant date.  Compensation cost is recognized over the estimated derived service period. Compensation cost related to these awards will not be adjusted even if the market condition is not met.

During the three months ended June 30, 2022, the Company granted 126,028 PSUs (at target performance levels), respectively, which typically cliff vest after three-years, subject to continued employment. These awards are contingent and granted separately for each of the following metrics: adjusted EBITDA, net sales, and relative total shareholder return (“TSR”). Compensation cost is determined at the grant date andis recognized on a straight-line basis over the requisite service period to the extent the conditions are deemed probable. The number of shares earned at the end of the three-year period will vary, based only on actual performance, from 0% to 150% of the target number of PSUs granted. PSUs are not considered issued or outstanding ordinary shares of the Company.

Adjusted EBITDA and net sales are considered performance conditions. The Company will reassess the probability of achieving each performance condition separately each reporting period. TSR is considered a market condition because it measures the Company’s return against the performance of the Russell 3000, excluding companies classified as financials and real estate, over a given period of time. Compensation cost related to the TSR award will not be adjusted even if the market condition is not met.

18
The Company calculated the fair value of the PSUs for each component individually.

20
The fair value of PSUs subject to performance conditions is equal to the closing stock price on the grant date. The fair value of PSUs subject to thea market condition is determined using the Monte Carlo valuationsimulation model.

The following table summarizes the assumptions used in determining the fair value of the TSR awards:awards subject to market conditions:

 Three Months Ended 
 
Three Months Ended
June 30,
  June 30, 
 2022  2021  2023  2022 
Risk free interest rate  3.35%  0.47%  4.32%  3.35%
Expected life in years  3   3   0.8-1.8   3 
Expected volatility of MPA common stock  51.30%  53.70%  54.20%  51.30%
Expected average volatility of peer companies  62.70%  59.30%  -%  62.70%
Average correlation coefficient of peer companies  27.50%  26.70%  -%  27.50%
Expected dividend yield  0   0   -   - 
Grant date fair value $16.02  $26.89  $3.57-5.06  $16.02 

The following is a summary of non-vested PSUs:

 
Number of
Shares
  
Weighted Average
Grant Date Fair
Value
  
Number of
Shares
  
Weighted Average
Grant Date Fair
Value
 
Outstanding at March 31, 2022  84,593  $23.19 
Outstanding at March 31, 2023  192,696  $17.48 
Granted  126,028  $14.00   533,856  $4.20 
Vested  0  $0   -  $- 
Forfeited  0  $0   -  $- 
Outstanding at June 30, 2022  210,621  $17.70 
Outstanding at June 30, 2023  726,552  $7.73 

At June 30, 2022,2023, there was $3,033,0003,827,000 of unrecognized compensation expense related to these awards, which will be recognized over the weighted average remaining vesting period of approximately 2.51.7 years.

16. Commitments and Contingencies

Warranty Returns

The Company allows its customers to return goods that their consumers have returned to them, whether or not the returned item is defective (“warranty returns”). The Company accrues an estimate of its exposure to warranty returns based on a historical analysis of the level of this type of return as a percentage of  unit sales. Amounts charged to expense for these warranty returns are considered in arriving at the Company’s net sales.

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The following summarizes the changes in the warranty return accrual:returns:

 
Three Months Ended
 
 
Three Months Ended
June 30,
  June 30, 
 2022  2021  2023  2022 
Balance at beginning of period $20,125,000  $21,093,000  $19,830,000  $20,125,000 
Charged to expense  30,920,000   27,261,000   31,112,000   30,920,000 
Amounts processed  (33,177,000)  (28,344,000)  (34,265,000)  (33,177,000)
Balance at end of period $17,868,000  $20,010,000  $16,677,000  $17,868,000 

Contingencies

The Company is subject to various lawsuits and claims. In addition, government agencies and self-regulatory organizations have the ability to conduct periodic examinations of and administrative proceedings regarding the Company’s business. Following an audit in fiscal 2019, the U.S. Customsbusiness, and Border Protection stated that it believed that the Company owed additional dutiesits compliance with law, code, and regulations related to all matters including but not limited to environmental, information security, taxes, levies, tariffs and such.

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17. Segment Information



Effective as of the fourth quarter of fiscal 2023, the Company revised its segment reporting as it determined that its three operating segments no longer met the criteria to be aggregated. The Company recast its prior year segment disclosures to conform to the current year’s presentation.



The Company’s three operating segments are:



•
Hard Parts, including (i) light duty rotating electric products such as alternators and starters, (ii) wheel hub products, (iii) brake-related products, including brake calipers, brake boosters, brake rotors, brake pads and brake master cylinders, and (iv) turbochargers,

•
Test Solutions and Diagnostic Equipment, including (i) applications for combustion engine vehicles, including bench top testers for alternators and starters, (ii) equipment for the pre- and post-production of electric vehicles, and (iii) software emulation of power systems applications for the electrification of all forms of transportation (including automobiles, trucks, the emerging electrification of systems within the aerospace industry, and electric vehicle charging stations), and

•
Heavy Duty, including non-discretionary automotive aftermarket replacement hard parts for heavy-duty truck, industrial, marine, and agricultural applications.



The Company’s Hard Parts operating segment meets the criteria of a reportable segment while Test Solutions and Diagnostic Equipment and Heavy Duty are not material, are not required to be separately reported, and are included within the “all other” category.


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Financial information relating to the Company’s segments is as follows:


  Three Months Ended June 30, 2023 
  Hard Parts  All Other  Total 
Net sales to external customers $149,747,000  $9,958,000  $159,705,000 
Intersegment sales  132,000   95,000   227,000 
Operating income (loss)  11,506,000   (1,079,000)  10,427,000 
Depreciation and amortization  2,679,000   354,000   3,033,000 
Segment assets  1,063,301,000   52,368,000   1,115,669,000 
Capital expenditures  40,000   -   40,000 


  Three Months Ended June 30, 2022 
  Hard Parts  All Other  Total 
Net sales to external customers $152,428,000  $11,557,000  $163,985,000 
Intersegment sales  147,000   142,000   289,000 
Operating income (loss)  9,611,000   (2,280,000)  7,331,000 
Depreciation and amortization  2,751,000   373,000   3,124,000 
Segment assets  1,005,718,000   44,530,000   1,050,248,000 
Capital expenditures  1,342,000   33,000   1,375,000 


  Three Months Ended 
  June 30, 
Net sales 2023  2022 
Total net sales for reportable segment $149,879,000  $152,575,000 
Other net sales  10,053,000   11,699,000 
Elimination of intersegment net sales  (227,000)  (289,000)
Total consolidated net sales $159,705,000  $163,985,000 


  Three Months Ended 
  June 30, 
Profit or loss 2023  2022 
Total operating income for reportable segment $11,506,000  $9,611,000 
Other operating loss
  (1,079,000)  (2,280,000)
Elimination of intersegment operating income  14,000   4,000 
Interest expense, net  (11,720,000)  (6,921,000)
Change in fair value of compound net derivative liability  (140,000)  - 
Total consolidated (loss) income before income tax (benefit) expense $(1,419,000) $414,000 


Assets June 30, 2023  March 31, 2023 
Total assets for reportable segment $1,063,301,000  $1,032,739,000 
Other assets  52,368,000   49,778,000 
Elimination of intersegment assets  (57,482,000)  (53,952,000)
Total consolidated assets $1,058,187,000  $1,028,565,000 


18. Share Repurchases



In August 2018, the Company’s board of directors approved an increase in its share repurchase program from $20,000,000 to $37,000,000 of its common stock. During the three months months ended June 30, 2022,2023, the Company did 0tnot repurchase any shares of its common stock. As of June 30, 2022,2023, $18,745,000 washas been utilized and $18,255,000 remains available to repurchase shares under the authorized share repurchase program, subject to the limit in the Company’s Credit Facility. The Company retired the 837,007 shares repurchased under this program through June 30, 2022.2023. The Company’s share repurchase program does not obligate it to acquire any specific number of shares and shares may be repurchased in privately negotiated and/or open market transactions.

19. Related Party Transactions

Lease

In December 2022, the Company entered into an operating lease for its 35,000 square foot manufacturing, warehouse, and office facility in Ontario, Canada, with a company co-owned by a member of management. The lease, which commenced January 1, 2023, has an initial term of one year with a base rent of approximately $27,000 per month and includes options to renew for up to four years. The rent expense recorded by the Company for the related party lease was $81,000 for the three months ended June 30, 2023.

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23
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis presents factors that Motorcar Parts of America, Inc. and its subsidiaries (“our,” “we” or “us”) believe are relevant to an assessment and understanding of our consolidated financial position and results of operations. This financial and business analysis should be read in conjunction with our March 31, 20222023 audited consolidated financial statements included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on June 14, 2022.2023.

Disclosure Regarding Private Securities Litigation Reform Act of 1995

This report may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to our future performance that involve risks and uncertainties. All statements other than statements of historical fact are forward-looking statements, including, but not limited to, statements about our strategic initiatives, operational plans and objectives, expectations for economic conditions and recovery and future business and financial performance, as well as statements regarding underlying assumptions related thereto. They include, among others, factors related to the timing and implementation of strategic initiatives, the highly competitive nature of our industry, demand for our products and services, complexities in our inventory and supply chain, challenges with transforming and growing our business and factors related to the current global COVID-19 pandemic.business. Except as required by law, we undertake no obligation to revise or update publicly any forward-looking statements for any reason. Therefore, you should not place undue reliance on those statements. Please refer to “Item 1A. Risk Factors” of our most recent Annual Report on Form 10-K filed with the SEC on June 14, 2022,2023, as updated by our subsequent filings with the SEC, for a description of these and other risks and uncertainties that could cause actual results to differ materially from those projected or implied by the forward-looking statements.

Management Overview

We haveWith a multi-pronged platform forscalable infrastructure and abundant growth withinopportunities, we are focused on growing our aftermarket business in the automotive aftermarket for non-discretionary replacement hard partsNorth American marketplace and growing our leadership position in the test solutions. In addition, we offersolutions and diagnostic equipment applications focused on the fast-evolving electric mobility markets.market by providing innovative and intuitive solutions to our customers. Our investments in infrastructure and human resources during the past few years reflects the significant expansion of manufacturing capacity to support multiple product lines and continues to be transformative and scalable.lines. These investments included (i) a 410,000 square foot distribution center, (ii) two buildings totaling 372,000 square feet for remanufacturing and core sorting of brake calipers, and (iii) the realignment of production at our initialoriginal 312,000 square foot facility in Mexico.

New products introduced through our growth strategies include: (i) brake calipers in August 2019; (ii) alternators and starters for heavy-duty truck, industrial, marine, and agriculture applications, through an acquisition in January 2019; (iii) brake power boosters in August 2016; and (iv) turbochargers through an acquisition in July 2016. In addition, our test solutions and diagnostic equipment include: (a) the design and manufacture of test solutions and diagnostic equipment for alternators, starters, belt-start generators (stop start and hybrid technology), and electric power trains for electric vehicles through an acquisition in July 2017 and (b) the design and manufacture of advanced power emulators (AC and DC) and custom power electronic products for the automotive and aerospace industries through an acquisition in December 2018.Segment Reporting

Pursuant toEffective as of the guidance provided under the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) forfourth quarter of fiscal 2023, we revised our segment reporting as we have identified our chief operating decision maker (“CODM”), 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 three separate operating segments. The operating segments meet allno longer met the criteria to be aggregatedaggregated. We recast our prior year segment disclosures to conform to the current year’s presentation.

Our three operating segments are as follows:


•
Hard Parts, including (i) light duty rotating electric products such as alternators and starters, (ii) wheel hub products, (iii) brake-related products, including brake calipers, brake boosters, brake rotors, brake pads and brake master cylinders, and (iv) turbochargers,

•
Test Solutions and Diagnostic Equipment, including (i) applications for combustion engine vehicles, including bench top testers for alternators and starters, (ii) equipment for the pre- and post-production of electric vehicles, and (iii) software emulation of power systems applications for the electrification of all forms of transportation (including automobiles, trucks, the emerging electrification of systems within the aerospace industry, and electric vehicle charging stations), and

•
Heavy Duty, including non-discretionary automotive aftermarket replacement hard parts for heavy-duty truck, industrial, marine, and agricultural applications.

Our Hard Parts operating segment meets the criteria of a reportable segment. The Test Solutions and Diagnostic Equipment and Heavy Duty segments are not material, are not required to be separately reported, and are presented as such.

Impactincluded within the “all other” category. See Note 17 of the Novel Coronavirus (“COVID-19”)

The COVID-19 pandemic has spread globally and created significant volatility, uncertainty and economic disruption in many countries, including the countries in which we operate. National, state and local governments in these countries continuenotes to implement a variety of measures in response that have the effect of restricting or limiting, among other activities, the operations of certain businesses.condensed consolidated financial statements for more information.

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We continue to experience disruptions with worldwide supply chain and logistics services. We are unable to predict accurately the ultimate long-term impact that COVID-19 will have on our business and financial condition. While the near-term outlook appears positive, any additional government shutdowns or the emergence and spread of new variants of the virus, including the Delta or Omicron variant, the likelihood of a resurgence of positive cases, the development, availability and public acceptance of effective treatments and vaccines, the speed at which such vaccines are administered, the efficacy of current vaccines against evolving strains or variants of the virus, could negatively impact our business and financial condition.

There have been no serious outbreaks in any of our production facilities; however, a serious outbreak could affect our production capabilities. We continue to incur costs as a result of COVID-19, including employee costs and other operating costs associated with the provision of personal protective equipment, which have negatively impacted our profitability. These expanded benefits, supply costs and other COVID-19 related costs resulted in total expense, included in cost of goods sold and operating expenses in the condensed consolidated statements of operations, of $715,000 and $854,000 during the three months ended June 30, 2022 and 2021, respectively.

Results of Operations for the Three Months Ended June 30, 20222023 and 20212022

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

The following summarizes certain key operating data:


 
Three Months Ended
June 30,
 

 2022  2021 
Cash flow used in operations $(982,000) $(4,739,000)
Finished goods turnover (annualized) (1)  3.1   4.5 
    
Three Months Ended
June 30,
  
  2023  2022 
Consolidated cash flow used in operations 
$
(20,470,000
)
 
$
(982,000
)
Consolidated finished goods turnover (annualized) (1)  
3.5
   
3.1
 


(1)
Annualized finished goods turnover for the fiscal quarter is calculated by multiplying cost of goods sold for the quarter by 4 and dividing the result by the average between beginning and ending non-core finished goods inventory values for the fiscal quarter. We believe this provides a useful measure of our ability to turn our inventory into revenues. The first quarter of fiscal 2023 reflects our investment in inventory to address disruptions related to the worldwide supply chain and logistics challenges to meet higher anticipated future sales.

Net Sales and Gross Profit

The following summarizes net sales and gross profit:


 
Three Months Ended
June 30,
   
Three Months Ended
June 30,
  

 2022  2021  2023  2022 
Net sales $163,985,000  $149,034,000  
$
159,705,000
 
$
163,985,000
 
Cost of goods sold  133,683,000   125,463,000  
133,138,000
 
133,683,000
 
Gross profit  30,302,000   23,571,000  
26,567,000
 
30,302,000
 
Gross profit percentage  18.5%  15.8% 
16.6
%
 
18.5
%

Net Sales. Our net sales for the three months ended June 30, 20222023 were $163,985,000,$159,705,000, which represents an increasea decrease of $14,951,000,$4,280,000, or 10.0%2.6%, from the three months ended June 30, 20212022 of $149,034,000. While our net sales$163,985,000. Sales for the quarter increased due to strong demand forthree months ended June 30, 2023 were impacted by the purchasing patterns of certain of our products, we experienced a numberlargest customers, which were partially offset by growing sales of challenges related to the global COVID-19 pandemic, including disruptions with worldwide supply chain and logistics services during both periods.our brake-related products.

22
Gross Profit. Our gross profit increased $6,731,000,was $26,567,000, or 28.6%, to $30,302,00016.6% of net sales, for the three months ended June 30, 20222023 compared with $23,571,000 for the three months ended June 30, 2021.

Our gross margin was$30,302,000, or 18.5% of net sales, for the three months ended June 30, 2022 compared with 15.8% of net sales2022. This change in our gross margin for the three months ended June 30, 2021. Despite an increase in the gross margin, our gross margin reflects inflationary costs related to the global pandemic, including disruptions2023 compared with worldwide supply chain, logistics services, and related higher freight costs.

Our gross margin was impacted for the three months ended June 30, 2022 was due primarily to changes in product mix and 2021 by higher freight costs, net of certain price increases, of approximately $1,749,000, and $2,990,000, respectively. For the three months ended June 30, 2022 and 2021, we incurred(i) additional expenses of $799,000$1,984,000 and $1,771,000,$799,000, respectively, primarily due to certain costs for disruptions in the supply chain.

Our gross margin for the three months ended June 30, 2022 and 2021 was also impacted bychain, (ii) amortization of core and finished goods premiums paid to customers related to new business of $3,044,000$2,657,000 and $2,667,000, respectively.  Gross margin for$3,044,000, respectively, and (iii) the three months ended June 30, 2021 was further impacted by transition expenses in connection with the expansion of our brake-related operations in Mexico of $1,947,000.

In addition, gross margin was impacted by (i) non-cash quarterly revaluation of cores that are part of the finished goods on the customers’ shelves (which are included in contract assets) to the lower of cost or net realizable value, which resulted in a write-down of $778,000 and $572,000, and $984,000 for the three months ended June 30, 2022 and 2021, respectively.

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Operating Expenses

The following summarizes operating expenses:


  
Three Months Ended
June 30,

  
Three Months Ended
June 30,
  

 2022  2021  2023  2022 
General and administrative $13,634,000  $12,486,000  
$
12,602,000
 
$
13,634,000
 
Sales and marketing 5,542,000  5,368,000  
5,419,000
 
5,542,000
 
Research and development 3,113,000  2,501,000  
2,375,000
 
3,113,000
 
Foreign exchange impact of lease liabilities and forward contracts 678,000  (2,533,000) 
(4,270,000
)
 
678,000
 
     
Percent of net sales           
     
General and administrative 8.3% 8.4% 
7.9
%
 
8.3
%
Sales and marketing 3.4% 3.6% 
3.4
%
 
3.4
%
Research and development 1.9% 1.7% 
1.5
%
 
1.9
%
Foreign exchange impact of lease liabilities and forward contracts 0.4% (1.7)% 
(2.7
)%
 
0.4
%

General and Administrative. Our general and administrative expenses for the three months ended June 30, 20222023 were $13,634,000,$12,602,000, which represents an increasea decrease of $1,148,000,$1,032,000, or 9.2%7.6%, from the three months ended June 30, 20212022 of $12,486,000.$13,634,000. This increasedecrease was primarily due to (i) $820,000 of increased expense resulting fromthe favorable foreign currency transactions, (ii) $302,000 of increased professional services, (iii) $162,000 of increased information technology costs in connectionexchange rates during the three months ended June 30, 2023 as compared with cybersecurity and other productivity tools, and (iv) $80,000 of increased travel costs as some business travel resumed. These increases were partially offset by $327,000 of decreased share-based compensation in connection with equity grants made to employees in fiscal 2023.the three months ended June 30, 2022.

23
Sales and Marketing. Our sales and marketing expenses for the three months ended June 30, 20222023 were $5,542,000,$5,419,000, which represents an increasea decrease of $174,000,$123,000, or 3.2%2.2%, from the three months ended June 30, 20212022 of $5,368,000.$5,542,000. This increasedecrease was primarily due to (i) $236,000$258,000 of increased commissionsdecreased employee-related expenses due to higher sales and (ii) $118,000 of increased travel costs as some business travel resumed. These increases wereour cost-cutting measures partially offset by $207,000$172,000 of lower marketing and advertising expenses compared with the prior year.increased commissions.

Research and Development. Our research and development expenses for the three months ended June 30, 20222023 were $3,113,000,$2,375,000, which represents an increasea decrease of $612,000,$738,000, or 24.5%23.7%, from the three months ended June 30, 20212022 of $2,501,000.$3,113,000. This increasedecrease was primarily due to (i) $376,000$427,000 of increaseddecreased employee-related expenses primarily due to our electric vehicle testing system initiatives,cost-cutting measures, (ii) $125,000$178,000 of increaseddecreased outside services, and (iii) $121,000 of decreased purchases of samples for our core library and other research and development supplies, and (iii) $82,000 of increased outside services primarily due to development projects.supplies.

Foreign Exchange Impact of Lease Liabilities and Forward Contracts. Our foreign exchange impact of lease liabilities and forward contracts for the three months ended June 30, 20222023 was a non-cash gain of $4,270,000 compared with a non-cash loss of $678,000 compared with a non-cash gain of $2,533,000 for the three months ended June 30, 2021.2022. This change was primarily due to (i) the remeasurement of our foreign currency-denominated lease liabilities, which resulted in non-cash gains of $3,770,000 and $20,000 compared with $2,795,000 for the three months ended June 30, 20222023 and 2021,2022, respectively, due to foreign currency exchange rate fluctuations and (ii) the forward foreign currency exchange contracts, which resulted in a non-cash lossesgain of $500,000 compared with a non-cash loss of $698,000 compared with $262,000 for the three months ended June 30, 20222023 and 2021,2022, respectively, due to the changes in their fair values.

Operating Income

Consolidated Operating Income. Our consolidated operating income for the three months ended June 30, 2023 was $10,441,000, which represents an increase of $3,106,000, or 42.3%, from the three months ended June 30, 2022 of $7,335,000. Operating income increased primarily due to lower operating expenses partially offset by decreased gross profit as discussed above.

26
Interest Expense

Interest Expense, net. Our interest expense for the three months ended June 30, 20222023 was $6,921,000,$11,720,000, which represents an increase of $2,980,000,$4,799,000, or 75.6%69.3%, from interest expense for the three months ended June 30, 20212022 of $3,941,000.$6,921,000. This increase was primarily due to higher interest rates on our borrowing and increased average borrowing under our credit facility.accounts receivable discount programs, which have variable interest rates. Interest expense for the three months ended June 30, 2023 was further impacted by interest expense incurred on the Convertible Notes.

Change in Fair Value of Compound Net Derivative Liability

Change in Fair Value of Compound Net Derivative Liability. Our change in fair value of compound net derivative liability for the three months ended June 30, 2023 was a non-cash loss of $140,000 associated with the Convertible Notes issued on March 31, 2023.

Provision for Income Taxes

Income Tax. We recorded an income tax benefit of $9,000, or an effective tax rate of 0.6%, and income tax expense of $589,000, or an effective tax rate of 142.3%, and $947,000, or an effective tax rate of 52.4%, for the three months ended June 30, 20222023 and 2021,2022, respectively. Effective tax rates are based on current annual projections and any changes in future periods could result in an effective tax rate that is materially different from the current estimate. The effective tax rate for the three months ended June 30, 2022,2023, was primarily impacted by (i) specific jurisdictions that we do not expect to recognize the benefit of losses, (ii) foreign income taxed at rates that are different from the federal statutory rate, and (iii)(ii) non-deductible executive compensation under Internal Revenue Code Section 162(m)., and (iii) specific jurisdictions that we do not expect to recognize the benefit of losses.

Liquidity and Capital Resources

Overview

We had working capital (current assets minus current liabilities) of $115,077,000$153,726,000 and $110,580,000,$154,886,000, a ratio of current assets to current liabilities of 1.3:1.4:1.0, at June 30, 20222023 and March 31, 2022,2023, respectively.  The increasechange in our working capital reflects our investment in inventory to address disruptions relatedis due to the worldwide supply chain and logistics challengesshort-term classification of our term loans as we plan to meetrepay the outstanding balance in August 2023 partially offset by the replenishment of our inventory due to higher anticipated sales.sales in the prior year.

We generatedhave $32,000,000 of aggregate principal amount of convertible notes outstanding that bear interest at a rate of 10% per year. The convertible notes may either be redeemed for cash, during the three months ended Juneconverted into shares of our common stock, or a combination thereof, at our election. The convertible notes will mature on March 30, 20222029, unless earlier converted, repurchased or redeemed.

Our primary source of liquidity was from the use of our receivable discount programs and credit facility.facility during the three months ended June 30, 2023. In addition, we have access to our existing cash, as well as our available credit facilities to meet short-term liquidity needs. 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.

24
Share Repurchase Program

In August 2018, our board of directors approved an increase in our share repurchase program from $20,000,000 to $37,000,000 of our common stock. As of June 30, 2022,2023, $18,745,000 washad been utilized and $18,255,000 remains available to repurchase shares under the authorized share repurchase program, subject to the limit in our credit facility. We retired the 837,007 shares repurchased under this program through June 30, 2022.2023. Our share repurchase program does not obligate us to acquire any specific number of shares and shares may be repurchased in privately negotiated and/or open market transactions.

27
Cash Flows

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



Three Months Ended
June 30,
   
Three Months Ended
June 30,
 

 2022  2021  2023 2022 
Cash flows (used in) provided by:           
Operating activities $(982,000) $(4,739,000) 
$
(20,470,000
)
 
$
(982,000
)
Investing activities (1,461,000) (2,089,000)  
(67,000
)
  
(1,461,000
)
Financing activities (11,266,000) 16,094,000   
19,673,000
   
(11,266,000
)
Effect of exchange rates on cash and cash equivalents  (90,000)  94,000   
155,000
   
(90,000
)
Net (decrease) increase in cash and cash equivalents $(13,799,000) $9,360,000 
Net decrease in cash and cash equivalents
 
$
(709,000
)
 
$
(13,799,000
)
Additional selected cash flow data:              
Depreciation and amortization $3,124,000  $3,145,000  
$
3,033,000
  
$
3,124,000
 
Capital expenditures 1,375,000  1,922,000   
40,000
   
1,375,000
 

Net cash used in operating activities was $982,000$20,470,000 and $4,739,000$982,000 during the three months ended June 30, 20222023 and 2021,2022, respectively. The primary change in our operating activities reflects increased operating results (net income plusour higher accounts receivable balances as we managed the net add-back for non-cash transactionsuse of our customers’ receivable discount programs and replenishment of inventory due to higher sales in earnings) and changes in operating assets and liabilities, including the timing of supplier payments and our investments in inventory to support anticipated future demand for our products. We continue to manage our working capital to maximize our operating cash flow.prior year.

Net cash used in investing activities was $1,461,000$67,000 and $2,089,000$1,461,000 during the three months ended June 30, 20222023 and 2021,2022, respectively. The change in our investing activities primarily resulted from decreased capital expenditures due to the completion of our expansion of our brake-related operations in Mexico during the second quarter of fiscal 2022.expenditures.

Net cash provided by financing activities was $19,673,000 compared with cash used in financing activities wasof $11,266,000 compared with net cash provided by financing activities of $16,094,000 during the three months ended June 30, 20222023 and 2021,2022, respectively. The change in our financing activities resulted from lowerincreased borrowing and higherlower repayments under our credit facility as we managed the use of our customers’ receivable discount programs to reduce overall interest expense during the three months ended June 30, 2022. In addition, we paid $1,102,000 for debt issuance costs in connection with the third amendment to the credit facility in the prior year.2023.

Capital Resources

Credit Facility

We are party to a $268,620,000 senior secured financing (as amended from time to time, the “Credit Facility”) with a syndicate of lenders, and PNC Bank, National Association, as administrative agent, consisting of (i) a $238,620,000 revolving loan facility subject to borrowing base restrictions, a $24,000,000 sublimit for borrowings by Canadian borrowers, and a $20,000,000 sublimit for letters of credit (the “Revolving Facility”), subject to certain restrictions, and (ii) a $30,000,000 term loan facility (the “Term Loans”). The loans under the Credit Facility mature on May 28, 2026. The Credit Facility currently permits the payment of up to $29,043,000 of dividends2026 and share repurchases for fiscal year 2023, subject to pro forma compliance with financial covenants. In connection with the Credit Facility, the lenders have a security interest in substantially all of our assets.

25
The Term Loans require quarterly principal payments of $937,500. The Credit Facility bears interest at rates equal to either LIBOR plus a margin of 2.25%, 2.50% or 2.75% or a reference rate plus a margin of 1.25%, 1.50% or 1.75%, in each case depending on the senior leverage ratio as of the applicable measurement date. There is also a facility fee of 0.375% to 0.50%, depending on the senior leverage ratio as of the applicable measurement date. The interest rate on our Term Loans and Revolving Facility was 3.82%8.52% and 4.20%8.46% respectively, at June 30, 2022,2023, and 2.99%8.02% and 3.13%8.13% respectively, at March 31, 2022.2023.

On August 3, 2023, we entered into a seventh amendment to the Credit Facility, which among other things, (i) permits us to repay our outstanding balance of Term Loans, (ii) permits the exclusion of quarterly principal payments of Term Loans from the fixed charge coverage ratio (including retrospectively for the prior periods) for all quarters beginning June 30, 2023, (iii) resets the fixed charge coverage ratio financial covenant level for the quarters ending September 30, 2023 and December 31, 2023, (iv) eliminates the senior leverage ratio financial covenant effective with the quarter ended June 30, 2023, (v) extends the minimum undrawn availability financial covenant through the delivery of the June 30, 2024 compliance certificate, and (vi) excludes the amount of all amendment fees and expenses incurred in connection with this amendment as well as prior unamortized fees associated with the Term Loans from bank EBITDA and the fixed charge coverage ratio financial covenant. The modifications to the financial covenants were effective as of June 30, 2023. On August 3, 2023, we repaid the outstanding balance of our Term Loans and wrote-off the remaining unamortized financing fees recorded in connection with the Term Loans.

28
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 amended financial covenants as of June 30, 2022.

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


 
Financial covenants
required under the
Credit Facility
  
Calculation as of
June 30, 2022
 
Maximum senior leverage ratio  3.00   2.53 
Minimum fixed charge coverage ratio  1.15   1.26 

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.2023.

We had $146,000,000$167,000,000 and $155,000,000$145,200,000 outstanding under the Revolving Facility at June 30, 20222023 and March 31, 2022,2023, respectively. In addition, $6,370,000 was outstanding for letters of credit at June 30, 2022.2023. At June 30, 2022,2023, after certain contractual adjustments, $86,250,000$65,250,000 was available under the Revolving Facility.

Convertible Notes

On March 31, 2023, we entered into a note purchase agreement, (the “Note Purchase Agreement”) with Bison Capital Partners VI, L.P. and Bison Capital Partners VI-A, L.P. (collectively, the “Purchasers”) and Bison Capital Partners VI, L.P., as the purchaser representative (the “Purchaser Representative”) for the issuance and sale of $32,000,000 in aggregate principal amount of convertible notes due in 2029 (the “Convertible Notes”), which was used for general corporate purposes. The Convertible Notes bear interest at a rate of 10.0% per annum, compounded annually, and payable (i) in kind or (ii) in cash, annually in arrears on April 1 of each year, commencing on April 1, 2024. The Convertible Notes have an initial conversion price of approximately $15.00 per share of common stock. (“Conversion Option”). Unless and until we deliver a redemption notice, the Purchasers of the Convertible Notes may convert their Convertible Notes at any time at their option. Upon conversion, the Convertible Notes will be settled in shares of our common stock. Except in the case of the occurrence of a fundamental transaction, as defined in the form of convertible promissory note, we may not redeem the Convertible Notes prior to March 31, 2026. After March 31, 2026, we may redeem all or part of the Convertible Notes for a cash purchase (the “Company Redemption”) price.

On June 8, 2023, we entered into the first amendment to the Note Purchase Agreement, which among other things, removed a provision that specified the Purchasers would be entitled to receive a dividend or distribution payable in certain circumstances. This amendment was effective as of March 31, 2023.

On August 1, 2023, we entered into the second amendment to the Note Purchase Agreement, which amended the definition of “Permitted Restricted Payments” to permit the prepayment of our Term Loans.

In connection with the Note Purchase Agreement, we entered into common stock warrants (the “Warrants”) with the Purchasers, which mature on March 30, 2029. The fair value of the Warrants, using Level 3 inputs and the Monte Carlo simulation model, was zero at June 30, 2023 and March 31, 2023.

The Company Redemption option has been combined with the Conversion Option as a compound net derivative liability (the “Compound Net Derivative Liability”). The Compound Net Derivative Liability has been recorded within convertible note, related party in the condensed consolidated balance sheets at June 30, 2023 and March 31, 2023. The fair value of the Conversion Option and the Company Redemption option using Level 3 inputs and the Monte Carlo simulation model was a liability of $10,800,000 and $10,400,000, and an asset of $2,230,000 and $1,970,000 at June 30, 2023 and March 31, 2023, respectively. During the three months ended June 30, 2023, we recorded $140,000 as the change in fair value of Compound Net Derivative Liability in the condensed consolidated statement of operations and condensed consolidated statement of cash flows.

The Convertible Notes also contain additional features, such as, default interest and options related to a fundamental transaction, which were not separately accounted for as the value of such features were not material at June 30, 2023 and March 31, 2023.

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 allow us to accelerate receipt of payment on customers’ receivables. While these arrangements have reduced our working capital needs, there can be no assurance that these programs will continue in the future. Interest expense resulting from these programs would increase if interest rates rise, if utilization of these discounting arrangements expands, if customers extend their payment to us, or if the discount period is extended to reflect more favorable payment terms to customers.

29
The following is a summary of the receivable discount programs:


 
Three Months Ended
June 30,
   
Three Months Ended
June 30,
  

 2022  2021  2023 2022 
Receivables discounted $142,624,000  $146,669,000  
$
104,332,000
 
$
142,624,000
 
Weighted average days  327   329 
Weighted average number of days collection was accelerated 
337
 
327
 
Annualized weighted average discount rate  3.7%  1.8% 
6.4
%
 
3.7
%
Amount of discount recognized as interest expense $4,874,000  $2,473,000  
$
6,252,000
 
$
4,874,000
 

Capital Expenditures and Commitments

Capital Expenditures

Our total capital expenditures, including finance leases and non-cash capital expenditures were $1,190,000$64,000 and $1,622,000$1,190,000 for the three months ended June 30, 20222023 and 2021,2022, respectively. These capital expenditures primarily include the purchase of equipment for our current operations. We completed the expansion of our operations in Mexico during the second quarter of fiscal 2022. We expect to incur approximately $9,500,000$5,000,000 of capital expenditures primarily to support our current operations and our growth initiates, including purchases of equipment during fiscal 2023.2024. We fund these expenditures primarily fromhave used and expect to continue using our working capital and leasing.additional capital lease obligations to finance these capital expenditures.

26Related Party Transactions

Lease
In December 2022, we entered into an operating lease for our 35,000 square foot manufacturing, warehouse, and office facility in Ontario, Canada, with a company co-owned by a member of Contentsmanagement. The lease, which commenced January 1, 2023, has an initial term of one year with a base rent of approximately $27,000 per month and includes options to renew for up to four years. The rent expense recorded for the related party lease was $81,000 for the three months ended June 30, 2023.

Litigation

ThereWe are subject to various lawsuits and claims. In addition, government agencies and self-regulatory organizations have been no material changesthe ability to conduct periodic examinations of and administrative proceedings regarding our litigationbusiness, and our compliance with law, code, and regulations related to all matters that are presented in our Annual Report on Form 10-K for the year ended March 31, 2022, which was filed on June 14, 2022.including but not limited to environmental, information security, taxes, levies, tariffs and such.

Critical Accounting Policies

There have been no material changes to our critical accounting policies and estimates that are presented in our Annual Report on Form 10-K for the year ended March 31, 2022,2023, which was filed on June 14, 2022.2023.

Item 3.Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in market risk from the information provided in Item 7A. “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K as of March 31, 2022,2023, which was filed with the SEC on June 14, 2022.2023.

30
Item 4.Controls and Procedures

Evaluation of Disclosure Controls and Procedures
 
We have established disclosure controls and procedures designed to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and that such information is accumulated and communicated to management, including our chief executive officer, chief financial officer, and chief accounting officer, as appropriate to allow timely decisions regarding required disclosures.
 
Under the supervision and with the participation of management, including our chief executive officer, chief financial officer, and chief accounting officer, we have conducted an evaluation of the effectiveness of our disclosure controls and procedures as defined in Exchange Act Rules 13a-15(e) and 15d-15(e). Based on this evaluation, our chief executive officer, chief financial officer, and chief accounting officer concluded that MPA’s disclosure controls and procedures were effective as of June 30, 2022.2023.

Inherent Limitations on Effectiveness of Controls
 
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Exchange Act Rules 13a-15(f) and 15d-15(f).
 
Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America, applying certain estimates and judgments as required.
 
Internal control over financial reporting includes those policies and procedures that:
 
1. Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;
 
2. Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
 
27
3. Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
Changes in Internal Control Over Financial Reporting
 
There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) that occurred during the three months ended June 30, 20222023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II — OTHER INFORMATION

Item 1.Legal Proceedings

ThereWe are subject to various lawsuits and claims. In addition, government agencies and self-regulatory organizations have been no material changesthe ability to conduct periodic examinations of and administrative proceedings regarding our litigationbusiness, and our compliance with law, code, and regulations related to all matters that are presented in our Annual Report on Form 10-K for the year ended March 31, 2022, which was filed on June 14, 2022.including but not limited to environmental, information security, taxes, levies, tariffs and such.

Item 1A.Risk Factors

There have been no material changes in the risk factors set forth in Item 1A to Part I of our Annual Report on Form 10-K for the fiscal year ended March 31, 2022,2023, filed on June 14, 2022.2023.

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

Limitation on Payment of Dividends and Share Repurchases

The Credit Facility currently permits the payment of up to $29,043,000$30,000,000 of dividends and share repurchases for fiscal year 2023,2024, subject to pro forma compliance with amended financial covenants.

Purchases of Equity Securities by the Issuer

Shares repurchased during the three months ended June 30, 20222023 were as follows:

Periods 
Total Number of
Shares Purchased
  
Average Price
Paid Per Share
  
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
  
Approximate
Dollar Value of
Shares That May
Yet Be Purchased
Under the Plans
or Programs (1)
  
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)
 
                     
April 1 - April 30, 2022:            
April 1 - April 30, 2023:
         
Open market and privately negotiated purchases -  $-  -  $18,255,000   -  
$
-
   -  
$
18,255,000
 
May 1 - May 31, 2022:            
May 1 - May 31, 2023:
                
Open market and privately negotiated purchases -  $-  -  18,255,000   -  
$
-
   -   
18,255,000
 
June 1 - June 30, 2022:            
June 1 - June 30, 2023:
                
Open market and privately negotiated purchases  -  $-   -   18,255,000   
-
  
$
-
   
-
   
18,255,000
 
Total  0      0  $18,255,000   
0
       
0
  
$
18,255,000
 


(1)
As of June 30, 2022,2023, $18,745,000 washad been utilized and $18,255,000 remains available to repurchase shares under the authorized share repurchase program, subject to the limit in our Credit Facility. We retired the 837,007 shares repurchased under this program through June 30, 2022.2023. Our share repurchase program does not obligate us to acquire any specific number of shares and shares may be repurchased in privately negotiated and/or open market transactions.

Item 3.Defaults Upon Senior Securities

None.

Item 5.Other Information
Item 5. Other Information
(a)None.
(b)None.
(c)During the quarter ended June 30, 2023, no director or officer of the Company adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement” as each such term is defined in Item 408 of Regulation S-K.

None.
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Item 6.Exhibits

(a)
Exhibits:

Number           Description of Exhibit           Method of Filing          
     
3.1
 
Certificate of Incorporation of the Company
 
Incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form SB-2 declared effective on March 22, 1994 (the “1994 Registration Statement”).
     
3.2
 
Amendment to Certificate of Incorporation of the Company
 
Incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form S-1 (No. 33-97498) declared effective on November 14, 1995.
     
3.3
 
Amendment to Certificate of Incorporation of the Company
 
     
3.4
 
Amendment to Certificate of Incorporation of the Company
 
     
3.5
 
Amendment to Certificate of Incorporation of the Company
 
     
3.6
 
Amended and Restated By-Laws of Motorcar Parts of America, Inc.
 
     
3.7
 
Certificate of Amendment of the Certificate of Incorporation of the Company
 
     
3.8
 
Amendment to the Amended and Restated By-Laws of Motorcar Parts of America, Inc., as adopted on June 9, 2016
 
     
3.9
 
Amendment to the Amended and Restated By-Laws of the Company
 
     
3.10
 Third Amendment to the Amended and Restated By-Laws of Motorcar Parts of America, Inc., as adopted on January 26, 2022 
     
4.1
 Description of the Registrant’s Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934 
Filed herewith.
Incorporated by reference to Exhibit 4.1 to Quarterly Report on Form 10-Q filed on August 9, 2022.
     
4.2
 
2004 Non-Employee Director Stock Option Plan
 
     
4.3
 
2010 Incentive Award Plan
 
     
4.4
 
Amended and Restated 2010 Incentive Award Plan
 

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Number           Description of Exhibit           Method of Filing          
     
4.5
 
Second Amended and Restated 2010 Incentive Award Plan
 
     
4.6
 
2014 Non-Employee Director Incentive Award Plan
 
     
4.7
 
Third Amended and Restated 2010 Incentive Award Plan
 
     
4.8
 
Fourth Amended and Restated 2010 Incentive Award Plan
 
4.9
2022 Incentive Award PlanIncorporated by reference to Appendix A to the Proxy Statement on Schedule 14A filed on July 29, 2022.
4.10
Form of Convertible Promissory NoteIncorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K filed on March 31, 2023.
4.11
Form of Common Stock WarrantIncorporated by reference to Exhibit 4.2 to the Current Report on Form 8-K filed on March 31, 2023.
4.12
First Amended and Restated Convertible Promissory NoteIncorporated by reference to Exhibit 4.12 to the Annual Report on Form 10-K filed on June 14, 2023.
4.13
First Amended and Restated Common Stock WarrantIncorporated by reference to Exhibit 4.13 to the Annual Report on Form 10-K filed on June 14, 2023.
10.1
Seventh Amendment to Amended and Restated Loan Agreement, dated as of August 3, 2023, among Motorcar Parts of America, Inc., D & V Electronics Ltd., Dixie Electric Ltd., and Dixie Electric Inc., each lender from time to time party thereto, and PNC Bank, National Association, as administrative agentFiled herewith.
10.2
Second Amendment to the Note Purchase AgreementFiled 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.
     
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.

34
Number          Description of Exhibit          Method of Filing          
     
101.INS
 
Inline XBRL Instance Document (the instance document does  not appear in the Interactive Data File because its XBRL tags are embedded within the inline XBRL document).
  
     
101.SCM
 
Inline XBRL Taxonomy Extension Schema Document
  
     
101.CAL
 
Inline XBRL Taxonomy Extension Calculation Linkbase Document
  
     
101.DEF
 
Inline XBRL Taxonomy Extension Definition Linkbase Document
  
     
101.LAB
 
Inline XBRL Taxonomy Extension Label Linkbase Document
  
     
101.PRE
 
Inline XBRL Taxonomy Extension Presentation Linkbase Document
  
     
104
 
Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)
  

3135
SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


MOTORCAR PARTS OF AMERICA, INC.



Dated: August 9, 20222023By:/s/ David Lee


David Lee


Chief Financial Officer



Dated: August 9, 20222023By:/s/ Kamlesh Shah


Kamlesh Shah


Chief Accounting Officer


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