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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 SEPTEMBER 30, 2023

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

FOR THE TRANSITION PERIOD FROM TO
Commission File No. 001-33861
MOTORCAR PARTS OF AMERICA, INC.
(Exact name of registrant as specified in its charter)

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

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

Registrant’s telephone number, including area code: (310) 212-7910
Securities registered pursuant to Section 12(b) of the Act:

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

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☑
There were 19,607,445 shares of Common Stock outstanding at November 2, 2023.

MOTORCAR PARTS OF AMERICA, INC.
TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION |
| Item 1. Financial Statements | 4
| Condensed Consolidated Balance Sheets | 4
| Condensed Consolidated Statements of Operations | 5
| Condensed Consolidated Statements of Comprehensive Income (Loss) | 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 | 25
| Item 3. Quantitative and Qualitative Disclosures About Market Risk | 34
| Item 4. Controls and Procedures | 34
PART II — OTHER INFORMATION |
| Item 1. Legal Proceedings | 36
| Item 1A. Risk Factors | 36
| Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | 36
| Item 3. Defaults Upon Senior Securities | 36
| Item 5. Other Information | 36
| Item 6. Exhibits | 37
| SIGNATURES | 40

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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.
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Table of Contents
PART I — FINANCIAL INFORMATION

Item 1. | Financial Statements

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

|  | September 30, 2023 |  |  | March 31, 2023 |
ASSETS |  | (Unaudited) |  |  |  |
Current assets: |  |  |  |  |  |
Cash and cash equivalents |  | $ | 10,293,000 |  |  | $ | 11,596,000 |
Short-term investments |  |  | 2,036,000 |  |  |  | 2,011,000 |
Accounts receivable — net |  |  | 161,120,000 |  |  |  | 119,868,000 |
Inventory |  |  | 366,405,000 |  |  |  | 356,254,000 |
Contract assets |  |  | 29,946,000 |  |  |  | 25,443,000 |
Prepaid expenses and other current assets |  |  | 18,415,000 |  |  |  | 22,306,000 |
Total current assets |  |  | 588,215,000 |  |  |  | 537,478,000 |
Plant and equipment — net |  |  | 41,368,000 |  |  |  | 46,052,000 |
Operating lease assets |  |  | 84,881,000 |  |  |  | 87,619,000 |
Long-term deferred income taxes |  |  | 32,206,000 |  |  |  | 32,625,000 |
Long-term contract assets |  |  | 313,613,000 |  |  |  | 318,381,000 |
Goodwill and intangible assets — net |  |  | 4,721,000 |  |  |  | 5,348,000 |
Other assets |  |  | 1,768,000 |  |  |  | 1,062,000 |
TOTAL ASSETS |  | $ | 1,066,772,000 |  |  | $ | 1,028,565,000 |
LIABILITIES AND SHAREHOLDERS’ EQUITY |  |  |  |  |  |  |  |
Current liabilities: |  |  |  |  |  |  |  |
Accounts payable and accrued liabilities |  | $ | 162,879,000 |  |  | $ | 141,766,000 |
Customer finished goods returns accrual |  |  | 29,956,000 |  |  |  | 37,984,000 |
Contract liabilities |  |  | 53,368,000 |  |  |  | 40,340,000 |
Revolving loan |  |  | 165,000,000 |  |  |  | 145,200,000 |
Other current liabilities |  |  | 5,032,000 |  |  |  | 4,871,000 |
Operating lease liabilities |  |  | 8,737,000 |  |  |  | 8,767,000 |
Current portion of term loan |  |  | - |  |  |  | 3,664,000 |
Total current liabilities |  |  | 424,972,000 |  |  |  | 382,592,000 |
Term loan, less current portion |  |  | - |  |  |  | 9,279,000 |
Convertible notes, related party |  |  | 31,819,000 |  |  |  | 30,994,000 |
Long-term contract liabilities |  |  | 198,086,000 |  |  |  | 193,606,000 |
Long-term deferred income taxes |  |  | 73,000 |  |  |  | 718,000 |
Long-term operating lease liabilities |  |  | 75,698,000 |  |  |  | 79,318,000 |
Other liabilities |  |  | 10,988,000 |  |  |  | 11,583,000 |
Total liabilities |  |  | 741,636,000 |  |  |  | 708,090,000 |
Commitments and contingencies |  |  |  |  |  |  |  |
Shareholders’ equity: |  |  |  |  |  |  |  |
Preferred stock; par value $0.01 per share, 5,000,000 shares authorized; none issued |  |  | - |  |  |  | - |
Series A junior participating preferred stock; par value $0.01 per share, 20,000 shares authorized; none issued |  |  | - |  |  |  | - |
Common stock; par value $0.01 per share, 50,000,000 shares authorized; 19,599,195 and 19,494,615 shares issued and outstanding at September 30, 2023 and March 31, 2023, respectively |  |  | 196,000 |  |  |  | 195,000 |
Additional paid-in capital |  |  | 234,399,000 |  |  |  | 231,836,000 |
Retained earnings |  |  | 85,379,000 |  |  |  | 88,747,000 |
Accumulated other comprehensive income (loss) |  |  | 5,162,000 |  |  |  | (303,000 | )
Total shareholders’ equity |  |  | 325,136,000 |  |  |  | 320,475,000 |
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY |  | $ | 1,066,772,000 |  |  | $ | 1,028,565,000 |

The accompanying notes to condensed consolidated financial statements are an integral part hereof.
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Table of Contents
MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)

|  | Three Months Ended |  |  | Six Months Ended |
|  | September 30, |  |  | September 30, |
|  | 2023 |  |  | 2022 |  |  | 2023 |  |  | 2022 |
Net sales |  | $ | 196,639,000 |  |  | $ | 172,543,000 |  |  | $ | 356,344,000 |  |  | $ | 336,528,000 |
Cost of goods sold |  |  | 155,491,000 |  |  |  | 146,027,000 |  |  |  | 288,629,000 |  |  |  | 279,710,000 |
Gross profit |  |  | 41,148,000 |  |  |  | 26,516,000 |  |  |  | 67,715,000 |  |  |  | 56,818,000 |
Operating expenses: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
General and administrative |  |  | 14,325,000 |  |  |  | 14,846,000 |  |  |  | 26,927,000 |  |  |  | 28,480,000 |
Sales and marketing |  |  | 5,688,000 |  |  |  | 6,066,000 |  |  |  | 11,107,000 |  |  |  | 11,608,000 |
Research and development |  |  | 2,438,000 |  |  |  | 2,670,000 |  |  |  | 4,813,000 |  |  |  | 5,783,000 |
Foreign exchange impact of lease liabilities and forward contracts |  |  | 4,760,000 |  |  |  | 1,082,000 |  |  |  | 490,000 |  |  |  | 1,760,000 |
Total operating expenses |  |  | 27,211,000 |  |  |  | 24,664,000 |  |  |  | 43,337,000 |  |  |  | 47,631,000 |
Operating income |  |  | 13,937,000 |  |  |  | 1,852,000 |  |  |  | 24,378,000 |  |  |  | 9,187,000 |
Other expenses: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest expense, net |  |  | 15,383,000 |  |  |  | 9,283,000 |  |  |  | 27,103,000 |  |  |  | 16,204,000 |
Change in fair value of compound net derivative liability |  |  | 390,000 |  |  |  | - |  |  |  | 530,000 |  |  |  | - |
Loss on extinguishment of debt |  |  | 168,000 |  |  |  | - |  |  |  | 168,000 |  |  |  | - |
Total other expenses |  |  | 15,941,000 |  |  |  | 9,283,000 |  |  |  | 27,801,000 |  |  |  | 16,204,000 |
Loss before income tax benefit |  |  | (2,004,000 | ) |  |  | (7,431,000 | ) |  |  | (3,423,000 | ) |  |  | (7,017,000 | )
Income tax benefit |  |  | (46,000 | ) |  |  | (914,000 | ) |  |  | (55,000 | ) |  |  | (325,000 | )
Net loss |  | $ | (1,958,000 | ) |  | $ | (6,517,000 | ) |  | $ | (3,368,000 | ) |  | $ | (6,692,000 | )
Basic net loss per share |  | $ | (0.10 | ) |  | $ | (0.34 | ) |  | $ | (0.17 | ) |  | $ | (0.35 | )
Diluted net loss per share |  | $ | (0.10 | ) |  | $ | (0.34 | ) |  | $ | (0.17 | ) |  | $ | (0.35 | )
Weighted average number of shares outstanding: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Basic |  |  | 19,599,162 |  |  |  | 19,272,557 |  |  |  | 19,554,142 |  |  |  | 19,197,181 |
Diluted |  |  | 19,599,162 |  |  |  | 19,272,557 |  |  |  | 19,554,142 |  |  |  | 19,197,181 |

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)
(Unaudited)

|  | Three Months Ended |  |  | Six Months Ended |
|  | September 30, |  |  | September 30, |
|  | 2023 |  |  | 2022 |  |  | 2023 |  |  | 2022 |
Net loss |  | $ | (1,958,000 | ) |  | $ | (6,517,000 | ) |  | $ | (3,368,000 | ) |  | $ | (6,692,000 | )
Other comprehensive income (loss), net of tax: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Foreign currency translation gain (loss) |  |  | 2,122,000 |  |  |  | 687,000 |  |  |  | 5,465,000 |  |  |  | (181,000 | )
Total other comprehensive income (loss), net of tax |  |  | 2,122,000 |  |  |  | 687,000 |  |  |  | 5,465,000 |  |  |  | (181,000 | )
Comprehensive income (loss) |  | $ | 164,000 |  |  | $ | (5,830,000 | ) |  | $ | 2,097,000 |  |  | $ | (6,873,000 | )

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 Shareholders’ Equity
(Unaudited)

|  | Common Stock |  |  |  |  |  |  |  |  |  |  |  |  |
|  | Shares |  |  | Amount |  |  | Additional Paid-in Capital |  |  | Retained Earnings |  |  | Accumulated Other Comprehensive Income (Loss) |  |  | Total |
Balance at March 31, 2023 |  |  | 19,494,615 |  |  | $ | 195,000 |  |  | $ | 231,836,000 |  |  | $ | 88,747,000 |  |  | $ | (303,000 | ) |  | $ | 320,475,000 |
Compensation recognized under employee stock plans |  |  | - |  |  |  | - |  |  |  | 1,310,000 |  |  |  | - |  |  |  | - |  |  |  | 1,310,000 |
Issuance of common stock upon vesting of RSUs, net of shares withheld for employee taxes |  |  | 104,530 |  |  |  | 1,000 |  |  |  | (280,000 | ) |  |  | - |  |  |  | - |  |  |  | (279,000 | )
Foreign currency translation |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 3,343,000 |  |  |  | 3,343,000 |
Net loss |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (1,410,000 | ) |  |  | - |  |  |  | (1,410,000 | )
Balance at June 30, 2023 |  |  | 19,599,145 |  |  | $ | 196,000 |  |  | $ | 232,866,000 |  |  | $ | 87,337,000 |  |  | $ | 3,040,000 |  |  | $ | 323,439,000 |
Compensation recognized under employee stock plans |  |  | - |  |  |  | - |  |  |  | 1,533,000 |  |  |  | - |  |  |  | - |  |  |  | 1,533,000 |
Issuance of common stock upon vesting of RSUs, net of shares withheld for employee taxes |  |  | 50 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Foreign currency translation |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 2,122,000 |  |  |  | 2,122,000 |
Net loss |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (1,958,000 | ) |  |  | - |  |  |  | (1,958,000 | )
Balance at September 30, 2023 |  |  | 19,599,195 |  |  | $ | 196,000 |  |  | $ | 234,399,000 |  |  | $ | 85,379,000 |  |  | $ | 5,162,000 |  |  | $ | 325,136,000 |

|  | Common Stock |  |  |  |  |  |  |  |  |  |  |  |  |
|  | Shares |  |  | Amount |  |  | Additional Paid-in Capital |  |  | Retained Earnings |  |  | Accumulated Other Comprehensive Income (Loss) |  |  | Total |
Balance at March 31,2022 |  |  | 19,104,751 |  |  | $ | 191,000 |  |  | $ | 227,184,000 |  |  | $ | 92,954,000 |  |  | $ | (5,066,000 | ) |  | $ | 315,263,000 |
Compensation recognized under employee stock plans |  |  | - |  |  |  | - |  |  |  | 1,249,000 |  |  |  | - |  |  |  | - |  |  |  | 1,249,000 |
Exercise of stock options, net of shares withheld for employee taxes |  |  | 25,543 |  |  |  | - |  |  |  | 191,000 |  |  |  | - |  |  |  | - |  |  |  | 191,000 |
Issuance of common stock upon vesting of RSUs, net of shares withheld for employee taxes |  |  | 84,684 |  |  |  | 1,000 |  |  |  | (895,000 | ) |  |  | - |  |  |  | - |  |  |  | (894,000 | )
Foreign currency translation |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (868,000 | ) |  |  | (868,000 | )
Net loss |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (175,000 | ) |  |  | - |  |  |  | (175,000 | )
Balance at June 30, 2022 |  |  | 19,214,978 |  |  | $ | 192,000 |  |  | $ | 227,729,000 |  |  | $ | 92,779,000 |  |  | $ | (5,934,000 | ) |  | $ | 314,766,000 |
Compensation recognized under employee stock plans |  |  | - |  |  |  | - |  |  |  | 1,251,000 |  |  |  | - |  |  |  | - |  |  |  | 1,251,000 |
Exercise of stock options, net of shares withheld for employee taxes |  |  | 193,378 |  |  |  | 2,000 |  |  |  | 584,000 |  |  |  | - |  |  |  | - |  |  |  | 586,000 |
Issuance of common stock upon vesting of RSUs, net of shares withheld for employee taxes |  |  | 14,792 |  |  |  | - |  |  |  | (75,000 | ) |  |  | - |  |  |  | - |  |  |  | (75,000 | )
Foreign currency translation |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 687,000 |  |  |  | 687,000 |
Net loss |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (6,517,000 | ) |  |  | - |  |  |  | (6,517,000 | )
Balance at September 30, 2022 |  |  | 19,423,148 |  |  | $ | 194,000 |  |  | $ | 229,489,000 |  |  | $ | 86,262,000 |  |  | $ | (5,247,000 | ) |  | $ | 310,698,000 |

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)

|  | Six Months Ended |
|  | September 30, |
|  | 2023 |  |  | 2022 |
Cash flows from operating activities: |  |  |  |  |  |
Net loss |  | $ | (3,368,000 | ) |  | $ | (6,692,000 | )
Adjustments to reconcile net loss to net cash used in operating activities: |  |  |  |  |  |  |  |
Depreciation and amortization |  |  | 5,966,000 |  |  |  | 6,214,000 |
Amortization of interest and loss on extinguishment of debt |  |  | 1,772,000 |  |  |  | 698,000 |
Accrued interest on convertible notes, related party |  |  | 1,600,000 |  |  |  | - |
Amortization of core premiums paid to customers |  |  | 4,994,000 |  |  |  | 5,759,000 |
Amortization of finished goods premiums paid to customers |  |  | 370,000 |  |  |  | 349,000 |
Noncash lease expense |  |  | 5,063,000 |  |  |  | 3,873,000 |
Foreign exchange impact of lease liabilities and forward contracts |  |  | 490,000 |  |  |  | 1,760,000 |
Change in fair value of compound net derivative liability |  |  | 530,000 |  |  |  | - |
(Gain) loss on short -term investments |  |  | (86,000 | ) |  |  | 387,000 |
Net provision for inventory reserves |  |  | 6,770,000 |  |  |  | 8,715,000 |
Net provision for customer payment discrepancies and credit losses |  |  | 1,419,000 |  |  |  | 1,012,000 |
Deferred income taxes |  |  | (145,000 | ) |  |  | (1,230,000 | )
Share-based compensation expense |  |  | 2,843,000 |  |  |  | 2,500,000 |
Loss on disposal of plant and equipment |  |  | 8,000 |  |  |  | 16,000 |
Changes in operating assets and liabilities: |  |  |  |  |  |  |  |
Accounts receivable |  |  | (42,576,000 | ) |  |  | 3,370,000 |
Inventory |  |  | (16,871,000 | ) |  |  | (26,286,000 | )
Prepaid expenses and other current assets |  |  | 1,962,000 |  |  |  | (3,039,000 | )
Other assets |  |  | (704,000 | ) |  |  | (70,000 | )
Accounts payable and accrued liabilities |  |  | 24,509,000 |  |  |  | 4,176,000 |
Customer finished goods returns accrual |  |  | (8,065,000 | ) |  |  | (10,533,000 | )
Contract assets |  |  | (4,971,000 | ) |  |  | (15,556,000 | )
Contract liabilities |  |  | 16,953,000 |  |  |  | 16,126,000 |
Operating lease liabilities |  |  | (4,090,000 | ) |  |  | (3,249,000 | )
Other liabilities |  |  | 457,000 |  |  |  | (5,254,000 | )
Net cash used in operating activities |  |  | (5,170,000 | ) |  |  | (16,954,000 | )
Cash flows from investing activities: |  |  |  |  |  |  |  |
Purchase of plant and equipment |  |  | (169,000 | ) |  |  | (2,644,000 | )
Purchase of short -term investments |  |  | 61,000 |  |  |  | (173,000 | )
Net cash used in investing activities |  |  | (108,000 | ) |  |  | (2,817,000 | )
Cash flows from financing activities: |  |  |  |  |  |  |  |
Borrowings under revolving loan |  |  | 32,005,000 |  |  |  | 40,000,000 |
Repayments of revolving loan |  |  | (12,205,000 | ) |  |  | (32,000,000 | )
Repayments of term loan |  |  | (13,125,000 | ) |  |  | (1,875,000 | )
Payments for debt issuance costs |  |  | (1,426,000 | ) |  |  | (21,000 | )
Payments on finance lease obligations |  |  | (962,000 | ) |  |  | (1,223,000 | )
Exercise of stock options, net of cash used to pay employee taxes |  |  | - |  |  |  | 777,000 |
Cash used to net share settle equity awards |  |  | (279,000 | ) |  |  | (969,000 | )
Net cash provided by financing activities |  |  | 4,008,000 |  |  |  | 4,689,000 |
Effect of exchange rate changes on cash and cash equivalents |  |  | (33,000 | ) |  |  | (323,000 | )
Net decrease in cash and cash equivalents |  |  | (1,303,000 | ) |  |  | (15,405,000 | )
Cash and cash equivalents — Beginning of period |  |  | 11,596,000 |  |  |  | 23,016,000 |
Cash and cash equivalents — End of period |  | $ | 10,293,000 |  |  | $ | 7,611,000 |
Supplemental disclosures of cash flow information: |  |  |  |  |  |  |  |
Cash paid for interest, net |  | $ | 23,831,000 |  |  | $ | 15,343,000 |
Cash paid for income taxes, net of refunds |  |  | 4,890,000 |  |  |  | 12,336,000 |
Cash paid for operating leases |  |  | 6,558,000 |  |  |  | 5,642,000 |
Cash paid for finance leases |  |  | 1,081,000 |  |  |  | 1,355,000 |
Plant and equipment acquired under finance leases |  |  | 33,000 |  |  |  | 529,000 |
Assets acquired under operating leases |  |  | 867,000 |  |  |  | 967,000 |
Non-cash capital expenditures |  |  | 120,000 |  |  |  | 272,000 |
Debt issuance costs included in accounts payable and accrued liabilities |  |  | 97,000 |  |  |  | - |

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
September 30, 2023
(Unaudited)
1. Company Background and Organization
Motorcar Parts of America, Inc. and its subsidiaries (the “Company”, or “MPA”) is a leading supplier of automotive aftermarket non-discretionary replacement parts, and test solutions and diagnostic equipment. These replacement parts are primarily sold to automotive retail chain stores and warehouse distributors throughout North America and to major automobile manufacturers for both their aftermarket programs and warranty replacement programs (“OES”). The Company’s test solutions and diagnostic equipment primarily serves the global automotive component and powertrain testing market. The Company’s products include (i) light duty and heavy duty rotating electrical products such as alternators and starters, (ii) wheel hub assemblies and bearings, (iii) brake-related products, which include brake calipers, brake boosters, brake rotors, brake pads, brake shoes, and brake master cylinders, and (iv) other products, which include (a) turbochargers and (b) test solutions and diagnostic equipment including: (i) applications for combustion engine vehicles, including bench top testers for alternators and starters, (ii) equipment for the pre- and post-production of electric vehicles, and (iii) software emulation of power system applications for the electrification of all forms of transportation (including automobiles, trucks, the emerging electrification of systems within the aerospace industry, and electric vehicle charging stations).
2. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six months ended September 30, 2023 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2024. This report should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the fiscal year ended March 31, 2023, which are included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on June 14, 2023.
The accompanying condensed consolidated financial statements have been prepared on a consistent basis with, and there have been no material changes to the accounting policies described in Note 2, Summary of Significant Accounting Policies, to the consolidated financial statements that are presented in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2023.
3. Accounts Receivable — Net
The Company has trade accounts receivable that result from the sale of goods and services. Accounts receivable — net includes offset accounts related to allowances for credit losses, customer payment discrepancies, and returned goods authorizations (“RGAs”) issued for in-transit unit returns. The Company uses accounts receivable discount programs with certain customers and their respective banks (see Note 10).
Accounts receivable — net is comprised of the following:

|  | September 30, 2023 |  |  | March 31, 2023 |
Accounts receivable — trade |  | $ | 182,879,000 |  |  | $ | 136,076,000 |
Allowance for credit losses |  |  | (312,000 | ) |  |  | (339,000 | )
Customer payment discrepancies |  |  | (1,848,000 | ) |  |  | (1,634,000 | )
Customer returns RGA issued |  |  | (19,599,000 | ) |  |  | (14,235,000 | )
Total accounts receivable — net |  | $ | 161,120,000 |  |  | $ | 119,868,000 |

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4. Inventory
Inventory is comprised of the following:

|  | September 30, 2023 |  |  | March 31, 2023 |
Inventory |  |  |  |  |  |
Raw materials |  | $ | 152,835,000 |  |  | $ | 147,880,000 |
Work-in-process |  |  | 11,078,000 |  |  |  | 7,033,000 |
Finished goods |  |  | 200,270,000 |  |  |  | 201,198,000 |
|  |  | 364,183,000 |  |  |  | 356,111,000 |
Less allowance for excess and obsolete inventory |  |  | (16,490,000 | ) |  |  | (16,436,000 | )
Inventory — net |  |  | 347,693,000 |  |  |  | 339,675,000 |
Inventory unreturned |  |  | 18,712,000 |  |  |  | 16,579,000 |
Total inventory |  | $ | 366,405,000 |  |  | $ | 356,254,000 |

5. Contract Assets
During the three months ended September 30, 2023 and 2022, the Company reduced the carrying value of Remanufactured Cores held at customers’ locations by $1,995,000 and $1,269,000, respectively. During the six months ended September 30, 2023 and 2022, the Company reduced the carrying value of Remanufactured Cores held at customers’ locations by $2,773,000 and $1,841,000, respectively.
Contract assets are comprised of the following:

|  | September 30, 2023 |  |  | March 31, 2023 |
Short-term contract assets |  |  |  |  |  |
Cores expected to be returned by customers |  | $ | 17,982,000 |  |  | $ | 13,463,000 |
Core premiums paid to customers |  |  | 9,669,000 |  |  |  | 9,812,000 |
Upfront payments to customers |  |  | 1,509,000 |  |  |  | 1,593,000 |
Finished goods premiums paid to customers |  |  | 786,000 |  |  |  | 575,000 |
Total short-term contract assets |  | $ | 29,946,000 |  |  | $ | 25,443,000 |
Long-term contract assets |  |  |  |  |  |  |  |
Remanufactured cores held at customers’ locations |  | $ | 269,371,000 |  |  | $ | 271,628,000 |
Core premiums paid to customers |  |  | 34,493,000 |  |  |  | 38,310,000 |
Long-term core inventory deposits |  |  | 5,569,000 |  |  |  | 5,569,000 |
Finished goods premiums paid to customers |  |  | 2,604,000 |  |  |  | 2,530,000 |
Upfront payments to customers |  |  | 1,576,000 |  |  |  | 344,000 |
Total long-term contract assets |  | $ | 313,613,000 |  |  | $ | 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 September 30, |  |  | Six Months Ended September 30, |
|  | 2023 |  |  | 2022 |  |  | 2023 |  |  | 2022 |
Net sales |  |  |  |  |  |  |  |  |  |  |  |
Customer A |  |  | 37 | % |  |  | 39 | % |  |  | 35 | % |  |  | 38 | %
Customer C |  |  | 27 | % |  |  | 26 | % |  |  | 27 | % |  |  | 23 | %
Customer B |  |  | 21 | % |  |  | 20 | % |  |  | 20 | % |  |  | 22 | %
Customer D |  |  | 4 | % |  |  | 4 | % |  |  | 5 | % |  |  | 4 | %

Revenues for Customers A through C were derived from the Hard Parts segment and Test Solutions and Diagnostic Equipment segment. Revenues for Customer D were derived from the Hard Parts segment. See Note 17 for a discussion of the Company’s segments.
The largest customers accounted for the following percentage of accounts receivable – trade:

|  | September 30, 2023 |  |  | March 31, 2023 |
Accounts receivable - trade |  |  |  |  |  |
Customer A |  |  | 40 | % |  |  | 33 | %
Customer C |  |  | 24 | % |  |  | 21 | %
Customer B |  |  | 17 | % |  |  | 18 | %
Customer D |  |  | 6 | % |  |  | 12 | %

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

|  | Three Months Ended September 30, |  |  | Six Months Ended September 30, |
|  | 2023 |  |  | 2022 |  |  | 2023 |  |  | 2022 |
Product line |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Rotating electrical products |  |  | 67 | % |  |  | 67 | % |  |  | 66 | % |  |  | 67 | %
Brake-related products |  |  | 20 | % |  |  | 20 | % |  |  | 21 | % |  |  | 19 | %
Wheel hub products |  |  | 9 | % |  |  | 11 | % |  |  | 10 | % |  |  | 11 | %
Other products |  |  | 4 | % |  |  | 2 | % |  |  | 3 | % |  |  | 3 | %
|  |  | 100 | % |  |  | 100 | % |  |  | 100 | % |  |  | 100 | %

Significant Supplier Concentrations
The Company had no suppliers that accounted for more than 10% of inventory purchases for the three and six months ended September 30, 2023 and 2022.
7. Debt
The Company is party to a $268,620,000 senior secured financing, (as amended from time to time, the “Credit Facility”), consisting of a $238,620,000 revolving loan facility (the “Revolving Facility”), subject to certain restrictions, and a $30,000,000 term loan facility (the “Term Loans”). The loans under the Credit Facility mature on May 28, 2026 and the lenders have a security interest in substantially all of the assets of the Company.
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On August 3, 2023, the Company entered into a seventh amendment to the Credit Facility, which among other things, (i) permitted the Company to repay its outstanding balance of Term Loans, (ii) permitted the exclusion of quarterly principal payments of Term Loans from the fixed charge coverage ratio (including retrospectively for the prior periods) for all quarters beginning June 30, 2023, (iii) reset the fixed charge coverage ratio financial covenant level for the quarters ending September 30, 2023 and December 31, 2023, (iv) eliminated the senior leverage ratio financial covenant effective with the quarter ended June 30, 2023, (v) extended the minimum undrawn availability financial covenant through the delivery of the June 30, 2024 compliance certificate, and (vi) excluded the amount of all amendment fees and expenses incurred in connection with this amendment as well as prior unamortized fees associated with the Term Loans from bank EBITDA and the fixed charge coverage ratio financial covenant.
On August 3, 2023, the Company repaid the remaining outstanding balance of its Term Loans and recorded a loss on extinguishment of debt for the remaining unamortized debt issuance costs of $168,000 in the condensed consolidated statement of operations.
The Credit Facility, as amended, requires the Company to maintain a minimum fixed charge coverage ratio and a specified minimum undrawn availability. The Company was in compliance these covenants as of September 30, 2023.
The Company had $165,000,000 and $145,200,000 outstanding under the Revolving Facility at September 30, 2023 and March 31, 2023, respectively. In addition, $6,370,000 was outstanding for letters of credit at September 30, 2023. At September 30, 2023, after certain contractual adjustments, $67,250,000 was available under the Revolving Facility. The interest rate on the Company’s Revolving Facility was 8.68% and 8.13% respectively, at September 30, 2023 and March 31, 2023, respectively.
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.
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.
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The Company’s Convertible Notes are comprised of the following:

|  | September 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 |  |  | (8,021,000 | ) |  |  | (8,430,000 | )
Less: unamortized debt discount attributed to debt issuance costs |  |  | (1,120,000 | ) |  |  | (1,006,000 | )
Carrying amount of the Convertible Notes |  |  | 22,859,000 |  |  |  | 22,564,000 |
Plus: Compound Net Derivative Liability |  |  | 8,960,000 |  |  |  | 8,430,000 |
Net carrying amount of Convertible Notes, related party |  | $ | 31,819,000 |  |  | $ | 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 September 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 September 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 $11,300,000 and $10,400,000, and an asset of $2,340,000 and $1,970,000 at September 30, 2023 and March 31, 2023, respectively. During the three and six months ended September 30, 2023, the Company recorded $390,000 and $530,000, respectively, as the change in fair value of the Compound Net Derivative Liability in the condensed consolidated statement of operations and condensed consolidated statement of cash flows.
The Convertible Notes also contain additional features, such as, default interest and options related to a fundamental transaction, which were not separately accounted for as the value of such features were not material at September 30, 2023 and March 31, 2023.
Interest expense related to the Convertible Notes is as follows:

|  | Three Months Ended |  |  | Six Months Ended |
|  | September 30, |  |  | September 30, |
|  | 2023 |  |  | 2023 |
Contractual interest expense |  | $ | 800,000 |  |  | $ | 1,600,000 |
Accretion of debt discount |  |  | 208,000 |  |  |  | 409,000 |
Amortization of debt issuance costs |  |  | 30,000 |  |  |  | 57,000 |
Total interest expense |  | $ | 1,038,000 |  |  | $ | 2,066,000 |

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

|  | September 30, 2023 |  |  | March 31, 2023 |
Short-term contract liabilities |  |  |  |  |  |
Customer allowances earned |  | $ | 26,469,000 |  |  | $ | 19,997,000 |
Customer core returns accruals |  |  | 17,594,000 |  |  |  | 11,112,000 |
Accrued core payment |  |  | 3,258,000 |  |  |  | 3,056,000 |
Customer deposits |  |  | 2,766,000 |  |  |  | 3,232,000 |
Core bank liability |  |  | 1,713,000 |  |  |  | 1,686,000 |
Finished goods liabilities |  |  | 1,568,000 |  |  |  | 1,257,000 |
Total short-term contract liabilities |  | $ | 53,368,000 |  |  | $ | 40,340,000 |
Long-term contract liabilities |  |  |  |  |  |  |  |
Customer core returns accruals |  | $ | 175,923,000 |  |  | $ | 170,420,000 |
Core bank liability |  |  | 12,719,000 |  |  |  | 13,582,000 |
Accrued core payment |  |  | 9,155,000 |  |  |  | 9,171,000 |
Finished goods liabilities |  |  | 289,000 |  |  |  | 433,000 |
Total long-term contract liabilities |  | $ | 198,086,000 |  |  | $ | 193,606,000 |

9. Leases
The Company leases various facilities in North America and Asia under operating leases expiring through August 2033. The Company has material nonfunctional currency leases that could have a material impact on the Company’s condensed consolidated statements of operations. As required for other monetary liabilities, lessees remeasure foreign currency-denominated lease liabilities using the exchange rate at each reporting date, but the lease assets are nonmonetary assets measured at historical rates and are not affected by subsequent changes in the exchange rates. In connection with the remeasurement of these leases, the Company recorded a loss of $1,948,000 and $1,041,000 during the three months ended September 30, 2023 and 2022, respectively. During the six months ended September 30, 2023 and 2022, the Company recorded a gain of $1,822,000 and a loss of $1,021,000, respectively, in connection with the remeasurement of these leases. These amounts are included in foreign exchange impact of lease liabilities and forward contracts in the condensed consolidated statements of operations.
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Balance sheet information for leases is as follows:

Leases |  | Classification |  | September 30, 2023 |  |  | March 31, 2023 |
Assets: |  |  |  |  |  |  |  |
Operating |  | Operating lease assets |  | $ | 84,881,000 |  |  | $ | 87,619,000 |
Finance |  | Plant and equipment |  |  | 4,604,000 |  |  |  | 5,549,000 |
Total leased assets |  |  |  | $ | 89,485,000 |  |  | $ | 93,168,000 |
Liabilities: |  |  |  |  |  |  |  |  |  |
Current |  |  |  |  |  |  |  |  |  |
Operating |  | Operating lease liabilities |  | $ | 8,737,000 |  |  | $ | 8,767,000 |
Finance |  | Other current liabilities |  |  | 1,693,000 |  |  |  | 1,851,000 |
Long-term |  |  |  |  |  |  |  |  |  |
Operating |  | Long-term operating lease liabilities |  |  | 75,698,000 |  |  |  | 79,318,000 |
Finance |  | Other liabilities |  |  | 1,972,000 |  |  |  | 2,742,000 |
Total lease liabilities |  |  |  | $ | 88,100,000 |  |  | $ | 92,678,000 |

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

|  | Three Months Ended |  |  | Six Months Ended |
|  | September 30, |  |  | September 30, |
|  | 2023 |  |  | 2022 |  |  | 2023 |  |  | 2022 |
Lease cost |  |  |  |  |  |  |  |  |  |  |  |  |  |
Operating lease cost |  | $ | 3,761,000 |  |  | $ | 3,130,000 |  |  | $ | 7,503,000 |  |  | $ | 6,295,000 |
Short-term lease cost |  |  | 350,000 |  |  |  | 559,000 |  |  |  | 643,000 |  |  |  | 1,013,000 |
Variable lease cost |  |  | 146,000 |  |  |  | 179,000 |  |  |  | 332,000 |  |  |  | 364,000 |
Finance lease cost: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Amortization of finance lease assets |  |  | 391,000 |  |  |  | 489,000 |  |  |  | 794,000 |  |  |  | 1,028,000 |
Interest on finance lease liabilities |  |  | 57,000 |  |  |  | 64,000 |  |  |  | 119,000 |  |  |  | 132,000 |
Total lease cost |  | $ | 4,705,000 |  |  | $ | 4,421,000 |  |  | $ | 9,391,000 |  |  | $ | 8,832,000 |

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

Maturity of lease liabilities |  | Operating Leases |  |  | Finance Leases |  |  | Total |
2024 - remaining six months |  | $ | 6,959,000 |  |  | $ | 996,000 |  |  | $ | 7,955,000 |
2025 |  |  | 12,457,000 |  |  |  | 1,576,000 |  |  |  | 14,033,000 |
2026 |  |  | 12,154,000 |  |  |  | 844,000 |  |  |  | 12,998,000 |
2027 |  |  | 10,962,000 |  |  |  | 353,000 |  |  |  | 11,315,000 |
2028 |  |  | 10,871,000 |  |  |  | 194,000 |  |  |  | 11,065,000 |
Thereafter |  |  | 54,475,000 |  |  |  | 2,000 |  |  |  | 54,477,000 |
Total lease payments |  |  | 107,878,000 |  |  |  | 3,965,000 |  |  |  | 111,843,000 |
Less amount representing interest |  |  | (23,443,000 | ) |  |  | (300,000 | ) |  |  | (23,743,000 | )
Present value of lease liabilities |  | $ | 84,435,000 |  |  | $ | 3,665,000 |  |  | $ | 88,100,000 |

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Other information about leases is as follows:

|  | September 30, 2023 |  |  | March 31, 2023 |
Lease term and discount rate |  |  |  |  |  |
Weighted-average remaining lease term (years): |  |  |  |  |  |
Finance leases |  |  | 2.6 |  |  |  | 2.9 |
Operating leases |  |  | 8.7 |  |  |  | 9.0 |
Weighted-average discount rate: |  |  |  |  |  |  |  |
Finance leases |  |  | 6.0 | % |  |  | 5.9 | %
Operating leases |  |  | 5.8 | % |  |  | 5.8 | %

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

|  | Six Months Ended |
|  | September 30, |
|  | 2023 |  |  | 2022 |
Receivables discounted |  | $ | 255,303,000 |  |  | $ | 283,359,000 |
Weighted average number of days collection was accelerated |  |  | 338 |  |  |  | 327 |
Annualized weighted average discount rate |  |  | 6.6 | % |  |  | 4.4 | %
Amount of discount recognized as interest expense |  | $ | 15,940,000 |  |  | $ | 11,293,000 |

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

|  | Three Months Ended |  |  | Six Months Ended |
|  | September 30, |  |  | September 30, |
|  | 2023 |  |  | 2022 |  |  | 2023 |  |  | 2022 |
Net loss |  | $ | (1,958,000 | ) |  | $ | (6,517,000 | ) |  | $ | (3,368,000 | ) |  | $ | (6,692,000 | )
Basic shares |  |  | 19,599,162 |  |  |  | 19,272,557 |  |  |  | 19,554,142 |  |  |  | 19,197,181 |
Effect of potentially dilutive securities |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Diluted shares |  |  | 19,599,162 |  |  |  | 19,272,557 |  |  |  | 19,554,142 |  |  |  | 19,197,181 |
Net loss per share: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Basic net loss per share |  | $ | (0.10 | ) |  | $ | (0.34 | ) |  | $ | (0.17 | ) |  | $ | (0.35 | )
Diluted net loss per share |  | $ | (0.10 | ) |  | $ | (0.34 | ) |  | $ | (0.17 | ) |  | $ | (0.35 | )

Potential common shares that would have the effect of increasing diluted net income per share or decreasing diluted net loss per share are considered to be anti-dilutive and as such, these shares are not included in calculating diluted net loss per share. For the three and six months ended September 30, 2023 and 2022, there were 2,104,035 and 1,945,392, respectively, of potential common shares not included in the calculation of diluted net loss per share because their effect was anti-dilutive. In addition, for the three and six months ended September 30, 2023, there were 2,240,593, respectively, 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 September 30, 2023, the Warrants were not exercisable.
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12. Income Taxes
The Company recorded an income tax benefit of $46,000, or an effective tax rate of 2.3%, and $914,000, or an effective tax rate of 12.3%, for the three months ended September 30, 2023 and 2022, respectively. The Company recorded an income tax benefit of $55,000, or an effective tax rate of 1.6%, and $325,000, or an effective tax rate of 4.6%, for the six months ended September 30, 2023 and 2022, respectively. Effective tax rates are based on current annual projections and any changes in future periods could result in an effective tax rate that is materially different from the current estimate. The effective tax rate for the three and six months ended September 30, 2023, was primarily impacted by (i) non-deductible executive compensation under Internal Revenue Code Section 162(m), (ii) the portion of book expense related to convertible notes and derivatives that is not expected to be deductible for tax, (iii) foreign income taxed at rates that are different from the federal statutory rate, and (iv) specific jurisdictions that the Company does not expect to recognize the benefit of losses.
The Company and its subsidiaries file income tax returns in the U.S. federal, various state, and foreign jurisdictions with varying statutes of limitations. At September 30, 2023, the Company is under examination by the State of California for fiscal years 2021 and 2022. At September 30, 2023, the Company is not under any other examination in any material jurisdictions except for the State of California, and remains subject to examination from the years ended March 31, 2018. The Company believes no significant changes in the unrecognized tax benefits will occur within the next 12 months.
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 $52,278,000 and $48,486,000 at September 30, 2023 and March 31, 2023, respectively. These contracts generally have a term of one year or less, at rates agreed at the inception of the contracts. The counterparty to these derivative transactions is a major financial institution with investment grade credit rating; however, the Company is exposed to credit risk with this institution. The credit risk is limited to the potential unrealized gains (which offset currency fluctuations adverse to the Company) in any such contract should this counterparty fail to perform as contracted. Any changes in the fair values of forward foreign currency exchange contracts are included in foreign exchange impact of lease liabilities and forward contracts in the condensed consolidated statements of operations.
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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 |
|  | Three Months Ended |  |  | Six Months Ended |
Derivatives Not Designated as |  | September 30, |  |  | September 30, |
Hedging Instruments |  | 2023 |  |  | 2022 |  |  | 2023 |  |  | 2022 |
Forward foreign currency exchange contracts |  | $ | (2,812,000 | ) |  | $ | (41,000 | ) |  | $ | (2,312,000 | ) |  | $ | (739,000 | )

The fair value of the forward foreign currency exchange contracts of $1,577,000 and $3,889,000 is included in prepaid expenses and other current assets in the condensed consolidated balance sheets at September 30, 2023 and March 31, 2023, respectively. The changes in the fair values of forward foreign currency exchange contracts are included in foreign exchange impact of lease liabilities and forward contracts in the condensed consolidated statements of cash flows for the six months ended September 30, 2023 and 2022.
14. Fair Value Measurements
The following summarizes financial assets and liabilities measured at fair value, by level within the fair value hierarchy:

|  | September 30, 2023 |  |  | March 31, 2023 |
|  |  |  |  | Fair Value Measurements |  |  |  |  |  | Fair Value Measurements |
|  |  |  |  | Using Inputs Considered as |  |  |  |  |  | Using Inputs Considered as |
|  | Fair Value |  |  | Level 1 |  |  | Level 2 |  |  | Level 3 |  |  | Fair Value |  |  | Level 1 |  |  | Level 2 |  |  | Level 3 |
Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Short-term investments |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Mutual funds |  | $ | 2,036,000 |  |  | $ | 2,036,000 |  |  | $ | - |  |  | $ | - |  |  | $ | 2,011,000 |  |  | $ | 2,011,000 |  |  | $ | - |  |  | $ | - |
Prepaid expenses and other current assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Forward foreign currency exchange contracts |  |  | 1,577,000 |  |  |  | - |  |  |  | 1,577,000 |  |  |  | - |  |  |  | 3,889,000 |  |  |  | - |  |  |  | 3,889,000 |  |  |  | - |
Liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Other current liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Deferred compensation |  |  | 2,036,000 |  |  |  | 2,036,000 |  |  |  | - |  |  |  | - |  |  |  | 2,011,000 |  |  |  | 2,011,000 |  |  |  | - |  |  |  | - |
Convertible notes, related party |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Compound Net Derivative Liability |  |  | 8,960,000 |  |  |  | - |  |  |  | - |  |  |  | 8,960,000 |  |  |  | 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 September 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.
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The following assumptions were used to determine the fair value of the Compound Net Derivative Liability:

|  | September 30, 2023 |  |  | March 31, 2023 |
Risk free interest rate |  |  | 4.70 | % |  |  | 3.64 | %
Cost of equity |  |  | 22.90 | % |  |  | 21.80 | %
Weighted average cost of capital |  |  | 15.10 | % |  |  | 14.60 | %
Expected volatility of MPA common stock |  |  | 50.00 | % |  |  | 50.00 | %
EBITDA volatility |  |  | 40.00 | % |  |  | 35.00 | %

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

|  | Three Months Ended |  |  | Six Months Ended |
|  | September 30, |  |  | September 30, |
|  | 2023 |  |  | 2023 |
Beginning balance |  | $ | 8,570,000 |  |  | $ | 8,430,000 |
Changes in fair value of Compound Net Derivative Liability included in earnings |  |  | 390,000 |  |  |  | 530,000 |
Ending balance |  | $ | 8,960,000 |  |  | $ | 8,960,000 |

During the three and six months ended September 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 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 September 30, 2023 and March 31, 2023, the net carrying amount of the Convertible Notes was $31,819,000 and $30,994,000, respectively, with unamortized debt discounts and debt issuance costs of $9,141,000 and $9,436,000, respectively, and Compound Net Derivative Liability of $8,960,000 and $8,430,000, respectively. The estimated fair value of the Company’s Convertible Notes was $34,319,000 using Level 3 inputs at September 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
The Company granted options to purchase 132,133 shares of common stock during the six months ended September 30, 2023. No options to purchase shares of the Company’s common stock were granted during the six months ended September 30, 2022. The cost associated with stock options is estimated using the Black-Scholes option-pricing model. This model requires the input of subjective assumptions including the expected volatility of the underlying stock and the expected holding period of the option. These subjective assumptions are based on both historical and other information. Changes in the values assumed and used in the model can materially affect the estimate of fair value.
The following assumptions were used to derive the weighted average fair value of the stock options granted:

|  | Six Months Ended |
|  | September 30, |
|  | 2023 |
Weighted average risk free interest rate |  |  | 4.53 | %
Weighted average expected holding period (years) |  |  | 6.57 |
Weighted average expected volatility |  |  | 51.29 | %
Weighted average expected dividend yield |  |  | - |
Weighted average fair value of options granted |  | $ | 3.75 |

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The following is a summary of stock option transactions:

|  | Number of Shares |  |  | Weighted Average Exercise Price |
Outstanding at March 31, 2023 |  |  | 1,232,745 |  |  | $ | 20.20 |
Granted |  |  | 132,133 |  |  | $ | 9.32 |
Exercised |  |  | - |  |  | $ | - |
Forfeited/Cancelled |  |  | (108,456 | ) |  | $ | 19.59 |
Expired |  |  | (134,533 | ) |  | $ | 9.32 |
Outstanding at September 30, 2023 |  |  | 1,121,889 |  |  | $ | 20.28 |

At September 30, 2023, options to purchase 132,133 shares of common stock were unvested at a weighted average exercise price of $9.32.
At September 30, 2023, there was $491,000 of total unrecognized compensation expense related to unvested stock option awards, which will be recognized over the weighted average remaining vesting period of approximately 3.0 years.
Restricted Stock Units and Restricted Stock Awards (collectively “RSUs”)
The Company did not grant any restricted stock awards during the six months ended September 30, 2023. During the six months ended September 30, 2022, the Company granted (i) performance-based restricted stock awards which had a threshold performance level of 33,333 shares, a target performance level of 66,667 shares, and a maximum performance level of 100,000 shares at the grant date and (ii) 176,353 of time-based vesting restricted stock units, respectively, based on the closing market price on the grant date.
The following is a summary of non-vested RSUs:

|  | Number of Shares |  |  | Weighted Average Grant Date Fair Value |
Outstanding at March 31, 2023 |  |  | 429,354 |  |  | $ | 15.07 |
Granted |  |  | - |  |  | $ | - |
Vested |  |  | (147,300 | ) |  | $ | 15.67 |
Forfeited/Cancelled |  |  | (77,025 | ) |  | $ | 13.24 |
Outstanding at September 30, 2023 |  |  | 205,029 |  |  | $ | 15.33 |

At September 30, 2023, there was $1,866,000 of unrecognized compensation expense related to RSUs, which will be recognized over the weighted average remaining vesting period of approximately 1.3 years.
Performance Stock Units (“PSUs”)
During the six months ended September 30, 2023, the Company granted 585,583 PSUs, which vest, subject to continued employment, as follows: (i) if the stock price is greater than or equal to $10.00 per share, then 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 (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 six months ended September 30, 2022 , the Company granted 126,028 PSUs (at target performance levels), which cliff vest after three-years, subject to continued employment. These awards are contingent and granted separately for each of the following metrics: adjusted EBITDA, net sales, and relative total shareholder return (“TSR”). Compensation cost at the grant date is recognized on a straight-line basis over the requisite service period to the extent the conditions are deemed probable. The number of shares earned at the end of the three-year period will vary, based only on actual performance, from 0% to 150% of the target number of PSUs granted. Adjusted EBITDA and net sales are considered performance conditions. The Company will reassess the probability of achieving each performance condition separately each reporting period. TSR is considered a market condition because it measures the Company’s return against the performance of the Russell 3000, excluding companies classified as financials and real estate, over a given period of time. Compensation cost related to the TSR award will not be adjusted even if the market condition is not met. The Company calculated the fair value of the PSUs for each component individually.
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The fair value of PSUs subject to performance conditions is equal to the closing stock price on the grant date. The fair value of PSUs subject to a market condition is determined using the Monte Carlo simulation model.The following table summarizes the assumptions used in determining the fair value of the awards subject to market conditions:

|  | Six Months Ended September 30, |
|  | 2023 |  |  | 2022 |
Risk free interest rate |  |  | 4.32-4.35 | % |  |  | 3.35 | %
Expected life in years |  |  | 0.2-1.8 |  |  |  | 3 |
Expected volatility of MPA common stock |  |  | 54.2-55.1 | % |  |  | 51.30 | %
Expected average volatility of peer companies |  |  | - | % |  |  | 62.70 | %
Average correlation coefficient of peer companies |  |  | - | % |  |  | 27.50 | %
Expected dividend yield |  |  | - |  |  |  | - |
Grant date fair value |  | $ | 3.57-8.37 |  |  | $ | 16.02 |

The following is a summary of non-vested PSUs:

|  | Number of Shares |  |  | Weighted Average Grant Date Fair Value |
Outstanding at March 31, 2023 |  |  | 192,696 |  |  | $ | 17.48 |
Granted |  |  | 585,583 |  |  | $ | 4.50 |
Vested |  |  | - |  |  | $ | - |
Forfeited |  |  | (1,162 | ) |  | $ | 5.91 |
Outstanding at September 30, 2023 |  |  | 777,117 |  |  | $ | 7.72 |

At September 30, 2023, there was $3,298,000 of unrecognized compensation expense related to these awards, which will be recognized over the weighted average remaining vesting period of approximately 1.5 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 returns:

|  | Three Months Ended September 30, |  |  | Six Months Ended September 30, |
|  | 2023 |  |  | 2022 |  |  | 2023 |  |  | 2022 |
Balance at beginning of period |  | $ | 16,677,000 |  |  | $ | 17,868,000 |  |  | $ | 19,830,000 |  |  | $ | 20,125,000 |
Charged to expense |  |  | 37,022,000 |  |  |  | 33,895,000 |  |  |  | 68,134,000 |  |  |  | 64,815,000 |
Amounts processed |  |  | (37,502,000 | ) |  |  | (33,302,000 | ) |  |  | (71,767,000 | ) |  |  | (66,479,000 | )
Balance at end of period |  | $ | 16,197,000 |  |  | $ | 18,461,000 |  |  | $ | 16,197,000 |  |  | $ | 18,461,000 |

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, and its compliance with law, code, and regulations related to matters including, but not limited to, environmental, information security, taxes, levies, tariffs and such.
17. Segment Information
Effective as of the fourth quarter of fiscal 2023, the Company revised its segment reporting as it determined that its three operating segments no longer met the criteria to be aggregated. The Company recast its prior year segment disclosures to conform to the current year’s presentation.
The Company’s three operating segments are:

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

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

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

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

|  | Three Months Ended September 30, 2023 |
|  | Hard Parts |  |  | All Other |  |  | Total |
Net sales to external customers |  | $ | 184,421,000 |  |  | $ | 12,218,000 |  |  | $ | 196,639,000 |
Intersegment sales |  |  | 68,000 |  |  |  | 38,000 |  |  |  | 106,000 |
Operating income (loss) |  |  | 15,203,000 |  |  |  | (1,300,000 | ) |  |  | 13,903,000 |
Depreciation and amortization |  |  | 2,589,000 |  |  |  | 344,000 |  |  |  | 2,933,000 |
Segment assets |  |  | 1,074,783,000 |  |  |  | 51,668,000 |  |  |  | 1,126,451,000 |
Capital expenditures |  |  | 91,000 |  |  |  | 38,000 |  |  |  | 129,000 |

|  | Three Months Ended September 30, 2022 |
|  | Hard Parts |  |  | All Other |  |  | Total |
Net sales to external customers |  | $ | 166,061,000 |  |  | $ | 6,482,000 |  |  | $ | 172,543,000 |
Intersegment sales |  |  | 203,000 |  |  |  | 16,000 |  |  |  | 219,000 |
Operating income (loss) |  |  | 7,174,000 |  |  |  | (5,215,000 | ) |  |  | 1,959,000 |
Depreciation and amortization |  |  | 2,724,000 |  |  |  | 366,000 |  |  |  | 3,090,000 |
Segment assets |  |  | 1,022,669,000 |  |  |  | 42,823,000 |  |  |  | 1,065,492,000 |
Capital expenditures |  |  | 1,194,000 |  |  |  | 75,000 |  |  |  | 1,269,000 |

|  | Six Months Ended September 30, 2023 |
|  | Hard Parts |  |  | All Other |  |  | Total |
Net sales to external customers |  | $ | 334,168,000 |  |  | $ | 22,176,000 |  |  | $ | 356,344,000 |
Intersegment sales |  |  | 200,000 |  |  |  | 133,000 |  |  |  | 333,000 |
Operating income (loss) |  |  | 26,709,000 |  |  |  | (2,379,000 | ) |  |  | 24,330,000 |
Depreciation and amortization |  |  | 5,268,000 |  |  |  | 698,000 |  |  |  | 5,966,000 |
Capital expenditures |  |  | 131,000 |  |  |  | 38,000 |  |  |  | 169,000 |

|  | Six Months Ended September 30, 2022 |
|  | Hard Parts |  |  | All Other |  |  | Total |
Net sales to external customers |  | $ | 318,489,000 |  |  | $ | 18,039,000 |  |  | $ | 336,528,000 |
Intersegment sales |  |  | 350,000 |  |  |  | 158,000 |  |  |  | 508,000 |
Operating income (loss) |  |  | 16,785,000 |  |  |  | (7,495,000 | ) |  |  | 9,290,000 |
Depreciation and amortization |  |  | 5,475,000 |  |  |  | 739,000 |  |  |  | 6,214,000 |
Capital expenditures |  |  | 2,536,000 |  |  |  | 108,000 |  |  |  | 2,644,000 |

|  | Three Months Ended |  |  | Six Months Ended |
|  | September 30, |  |  | September 30, |
Net sales |  | 2023 |  |  | 2022 |  |  | 2023 |  |  | 2022 |
Total net sales for reportable segment |  | $ | 184,489,000 |  |  | $ | 166,264,000 |  |  | $ | 334,368,000 |  |  | $ | 318,839,000 |
Other net sales |  |  | 12,256,000 |  |  |  | 6,498,000 |  |  |  | 22,309,000 |  |  |  | 18,197,000 |
Elimination of intersegment net sales |  |  | (106,000 | ) |  |  | (219,000 | ) |  |  | (333,000 | ) |  |  | (508,000 | )
Total consolidated net sales |  | $ | 196,639,000 |  |  | $ | 172,543,000 |  |  | $ | 356,344,000 |  |  | $ | 336,528,000 |

|  | Three Months Ended |  |  | Six Months Ended |
|  | September 30, |  |  | September 30, |
Profit or loss |  | 2023 |  |  | 2022 |  |  | 2023 |  |  | 2022 |
Total operating income for reportable segment |  | $ | 15,203,000 |  |  | $ | 7,174,000 |  |  | $ | 26,709,000 |  |  | $ | 16,785,000 |
Other operating loss |  |  | (1,300,000 | ) |  |  | (5,215,000 | ) |  |  | (2,379,000 | ) |  |  | (7,495,000 | )
Elimination of intersegment operating income |  |  | 34,000 |  |  |  | (107,000 | ) |  |  | 48,000 |  |  |  | (103,000 | )
Interest expense, net |  |  | (15,383,000 | ) |  |  | (9,283,000 | ) |  |  | (27,103,000 | ) |  |  | (16,204,000 | )
Change in fair value of compound net derivative liability |  |  | (390,000 | ) |  |  | - |  |  |  | (530,000 | ) |  |  | - |
Loss on extinguishment of debt |  |  | (168,000 | ) |  |  | - |  |  |  | (168,000 | ) |  |  | - |
Total consolidated loss before income tax benefit |  | $ | (2,004,000 | ) |  | $ | (7,431,000 | ) |  | $ | (3,423,000 | ) |  | $ | (7,017,000 | )

Assets |  | September 30, 2023 |  |  | March 31, 2023 |
Total assets for reportable segment |  | $ | 1,074,783,000 |  |  | $ | 1,032,739,000 |
Other assets |  |  | 51,668,000 |  |  |  | 49,778,000 |
Elimination of intersegment assets |  |  | (59,679,000 | ) |  |  | (53,952,000 | )
Total consolidated assets |  | $ | 1,066,772,000 |  |  | $ | 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 and six months ended September 30, 2023, the Company did not repurchase any shares of its common stock. As of September 30, 2023, $18,745,000 has been utilized and $18,255,000 remains available to repurchase shares under the authorized share repurchase program, subject to the limit in the Company’s Credit Facility. The Company retired the 837,007 shares repurchased under this program through September 30, 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.
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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 and $162,000 for the three and six months ended September 30, 2023.
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis presents factors that Motorcar Parts of America, Inc. and its subsidiaries (“our,” “we” or “us”) believe are relevant to an assessment and understanding of our consolidated financial position and results of operations. This financial and business analysis should be read in conjunction with our March 31, 2023 audited consolidated financial statements included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on June 14, 2023.
Disclosure Regarding Private Securities Litigation Reform Act of 1995
This report may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to our future performance that involve risks and uncertainties. All statements other than statements of historical fact are forward-looking statements, including, but not limited to, statements about our strategic initiatives, operational plans and objectives, expectations for economic conditions and recovery and future business and financial performance, as well as statements regarding underlying assumptions related thereto. They include, among others, factors related to the timing and implementation of strategic initiatives, the highly competitive nature of our industry, demand for our products and services, complexities in our inventory and supply chain, challenges with transforming and growing our business. Except as required by law, we undertake no obligation to revise or update publicly any forward-looking statements for any reason. Therefore, you should not place undue reliance on those statements. Please refer to “Item 1A. Risk Factors” of our most recent Annual Report on Form 10-K filed with the SEC on June 14, 2023, as updated by our subsequent filings with the SEC, for a description of these and other risks and uncertainties that could cause actual results to differ materially from those projected or implied by the forward-looking statements.
Management Overview
With a scalable infrastructure and abundant growth opportunities, we are focused on growing our aftermarket business in the North American marketplace and growing our leadership position in the test solutions and diagnostic equipment market by providing innovative and intuitive solutions to our customers. Our investments in infrastructure and human resources during the past few years reflects the significant expansion of manufacturing capacity to support multiple product lines. These investments included (i) a 410,000 square foot distribution center, (ii) two buildings totaling 372,000 square feet for remanufacturing and core sorting of brake calipers, and (iii) the realignment of production at our original 312,000 square foot facility in Mexico.
Segment Reporting
Effective as of the fourth quarter of fiscal 2023, we revised our segment reporting as we determined that our three operating segments no longer met the criteria to be aggregated. We recast our prior year segment disclosures to conform to the current year’s presentation.
Our three operating segments are as follows:

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

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

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

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Our Hard Parts operating segment meets the criteria of a reportable segment. The Test Solutions and Diagnostic Equipment and Heavy Duty segments are not material, are not required to be separately reported, and are included within the “all other” category. See Note 17 of the notes to condensed consolidated financial statements for more information.
Results of Operations for the Three Months Ended September 30, 2023 and 2022
The following discussion and analysis should be read together with the financial statements and notes thereto appearing elsewhere herein.
The following summarizes certain key consolidated operating data:

|  | Three Months Ended September 30, |
|  | 2023 |  |  | 2022 |
Cash flow provided by (used in) operations |  | $ | 15,300,000 |  |  | $ | (15,972,000 | )
Finished goods turnover (annualized) (1) |  |  | 4.1 |  |  |  | 3.3 |

| (1) | Annualized finished goods turnover for the fiscal quarter is calculated by multiplying cost of goods sold for the quarter by 4 and dividing the result by the average between beginning and ending non-core finished goods inventory values for the fiscal quarter. We believe this provides a useful measure of our ability to turn our inventory into revenues.

Net Sales and Gross Profit
The following summarizes net sales and gross profit:

|  | Three Months Ended September 30, |
|  | 2023 |  |  | 2022 |
Net sales |  | $ | 196,639,000 |  |  | $ | 172,543,000 |
Cost of goods sold |  |  | 155,491,000 |  |  |  | 146,027,000 |
Gross profit |  |  | 41,148,000 |  |  |  | 26,516,000 |
Gross profit percentage |  |  | 20.9 | % |  |  | 15.4 | %

Net Sales. Our consolidated net sales for the three months ended September 30, 2023 were $196,639,000, which represents an increase of $24,096,000, or 14.0%, from the three months ended September 30, 2022 of $172,543,000. Our sales reflect strong demand for rotating electrical and brake-related products for the three months ended September 30, 2023 as compared with the three months ended September 30, 2022.
Gross Profit. Our consolidated gross profit was $41,148,000, or 20.9% of consolidated net sales, for the three months ended September 30, 2023 compared with $26,516,000, or 15.4% of consolidated net sales, for the three months ended September 30, 2022. The increase in our gross margin for the three months ended September 30, 2023 reflects the partial benefit of price increases that went into effect during the current quarter and changes in product mix.
In addition, our gross margin for the three months ended September 30, 2023 compared with the three months ended September 30, 2022 was impacted by (i) additional expenses of $3,199,000 and $2,113,000, respectively, primarily due to certain costs for disruptions in the supply chain, (ii) amortization of core and finished goods premiums paid to customers related to new business of $2,707,000 and $3,064,000, respectively, and (iii) the non-cash quarterly revaluation of cores that are part of the finished goods on the customers’ shelves (which are included in contract assets) to the lower of cost or net realizable value, which resulted in a write-down of $1,995,000 and $1,269,000, respectively.
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Operating Expenses
The following summarizes our consolidated operating expenses:

|  | Three Months Ended September 30, |
|  | 2023 |  |  | 2022 |
General and administrative |  | $ | 14,325,000 |  |  | $ | 14,846,000 |
Sales and marketing |  |  | 5,688,000 |  |  |  | 6,066,000 |
Research and development |  |  | 2,438,000 |  |  |  | 2,670,000 |
Foreign exchange impact of lease liabilities and forward contracts |  |  | 4,760,000 |  |  |  | 1,082,000 |
Percent of net sales |  |  |  |  |  |  |  |
General and administrative |  |  | 7.3 | % |  |  | 8.6 | %
Sales and marketing |  |  | 2.9 | % |  |  | 3.5 | %
Research and development |  |  | 1.2 | % |  |  | 1.5 | %
Foreign exchange impact of lease liabilities and forward contracts |  |  | 2.4 | % |  |  | 0.6 | %

General and Administrative. Our general and administrative expenses for the three months ended September 30, 2023 were $14,325,000, which represents a decrease of $521,000, or 3.5%, from the three months ended September 30, 2022 of $14,846,000. This decrease was primarily due to our cost-cutting measures and fluctuations in foreign currency exchange rates during the three months ended September 30, 2023 as compared with the three months ended September 30, 2022.
Sales and Marketing. Our sales and marketing expenses for the three months ended September 30, 2023 were $5,688,000, which represents a decrease of $378,000, or 6.2%, from the three months ended September 30, 2022 of $6,066,000. This decrease was primarily due to reduced trade shows, marketing and advertising expenses.
Research and Development. Our research and development expenses for the three months ended September 30, 2023 were $2,438,000, which represents a decrease of $232,000, or 8.7%, from the three months ended September 30, 2022 of $2,670,000. This decrease was primarily due to our cost-cutting measures, which included reduced employee-related expenses.
Foreign Exchange Impact of Lease Liabilities and Forward Contracts. Our foreign exchange impact of lease liabilities and forward contracts were non-cash losses of $4,760,000 and $1,082,000 for the three months ended September 30, 2023 and 2022, respectively. This change during the three months ended September 30, 2023 as compared with the three months ended September 30, 2022 was primarily due to (i) the remeasurement of our foreign currency-denominated lease liabilities, which resulted in non-cash losses of $1,948,000 and $1,041,000, respectively, due to foreign currency exchange rate fluctuations and (ii) the forward foreign currency exchange contracts, which resulted in non-cash losses of $2,812,000 and $41,000, respectively, due to the changes in their fair values.
Operating Income
Consolidated Operating Income. Our consolidated operating income for the three months ended September 30, 2023 was $13,937,000, which represents an increase of $12,085,000, or 652.5%, from the three months ended September 30, 2022 of $1,852,000, increased primarily due to higher sales and gross profit as discussed above.
Interest Expense
Interest Expense, net. Our interest expense for the three months ended September 30, 2023 was $15,383,000, which represents an increase of $6,100,000, or 65.7%, from interest expense for the three months ended September 30, 2022 of $9,283,000. This increase was primarily due to higher interest rates on our borrowing and accounts receivable discount programs, which have variable interest rates. Interest expense for the three months ended September 30, 2023 was further impacted by non-cash interest expense incurred on the Convertible Notes issued on March 31, 2023.
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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 September 30, 2023 was a non-cash loss of $390,000 associated with the convertible notes.
Loss on Extinguishment of Debt
Loss on Extinguishment of Debt. Our loss on extinguishment of debt was $168,000 in connection with the repayment of the remaining outstanding balance of our term loans during the three months ended September 30, 2023.
Provision for Income Taxes
Income Tax. We recorded an income tax benefit of $46,000, or an effective tax rate of 2.3%, and $914,000, or an effective tax rate of 12.3%, for the three months ended September 30, 2023 and 2022, respectively. Effective tax rates are based on current annual projections and any changes in future periods could result in an effective tax rate that is materially different from the current estimate. The effective tax rate for the three months ended September 30, 2023, was primarily impacted by (i) non-deductible executive compensation under Internal Revenue Code Section 162(m), (ii) the portion of book expense related to convertible notes and derivatives that is not expected to be deductible for tax, (iii) foreign income taxed at rates that are different from the federal statutory rate, and (iv) specific jurisdictions that we do not expect to recognize the benefit of losses.
Results of Operations for the Six Months Ended September 30, 2023 and 2022
The following discussion and analysis should be read together with the financial statements and notes thereto appearing elsewhere herein.
The following summarizes certain key consolidated operating data:

|  | Six Months Ended September 30, |
|  | 2023 |  |  | 2022 |
Cash flow used in operations |  | $ | (5,170,000 | ) |  | $ | (16,954,000 | )
Finished goods turnover (annualized) (1) |  |  | 3.8 |  |  |  | 3.3 |

| (1) | Annualized finished goods turnover for the fiscal period is calculated by multiplying cost of goods sold for the period by 2 and dividing the result by the average between beginning and ending non-core finished goods inventory values for the fiscal period. We believe this provides a useful measure of our ability to turn our inventory into revenues.

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Net Sales and Gross Profit
The following summarizes net sales and gross profit:

|  | Six Months Ended September 30, |
|  | 2023 |  |  | 2022 |
Net sales |  | $ | 356,344,000 |  |  | $ | 336,528,000 |
Cost of goods sold |  |  | 288,629,000 |  |  |  | 279,710,000 |
Gross profit |  |  | 67,715,000 |  |  |  | 56,818,000 |
Gross profit percentage |  |  | 19.0 | % |  |  | 16.9 | %

Net Sales. Our consolidated net sales for the six months ended September 30, 2023 were $356,344,000, which represents an increase of $19,816,000, or 5.9%, from the six months ended September 30, 2022 of $336,528,000. Our sales reflect strong demand for brake-related and rotating electrical products for the six months ended September 30, 2023 as compared with the six months ended September 30, 2022.
Gross Profit. Our consolidated gross profit was $67,715,000, or 19.0% of consolidated net sales, for the six months ended September 30, 2023 compared with $56,818,000, or 16.9% of consolidated net sales, for the six months ended September 30, 2022. The increase in our gross margin for the six months ended September 30, 2023 reflects the partial benefit of price increases that went into effect during the current six-month period and changes in product mix.
In addition, our gross margin for the six months ended September 30, 2023 compared with the six months ended September 30, 2022 was impacted by (i) additional expenses of $5,183,000 and $2,912,000, respectively, primarily due to certain costs for disruptions in the supply chain, (ii) amortization of core and finished goods premiums paid to customers related to new business of $5,364,000 and $6,108,000, respectively, and (iii) the non-cash quarterly revaluation of cores that are part of the finished goods on the customers’ shelves (which are included in contract assets) to the lower of cost or net realizable value, which resulted in a write-down of $2,773,000 and $1,841,000, respectively.
Operating Expenses
The following summarizes consolidated operating expenses:

|  | Six Months Ended September 30, |
|  | 2023 |  |  | 2022 |
General and administrative |  | $ | 26,927,000 |  |  | $ | 28,480,000 |
Sales and marketing |  |  | 11,107,000 |  |  |  | 11,608,000 |
Research and development |  |  | 4,813,000 |  |  |  | 5,783,000 |
Foreign exchange impact of lease liabilities and forward contracts |  |  | 490,000 |  |  |  | 1,760,000 |
Percent of net sales |  |  |  |  |  |  |  |
General and administrative |  |  | 7.6 | % |  |  | 8.5 | %
Sales and marketing |  |  | 3.1 | % |  |  | 3.4 | %
Research and development |  |  | 1.4 | % |  |  | 1.7 | %
Foreign exchange impact of lease liabilities and forward contracts |  |  | 0.1 | % |  |  | 0.5 | %

General and Administrative. Our general and administrative expenses for the six months ended September 30, 2023 were $26,927,000, which represents a decrease of $1,553,000, or 5.5%, from the six months ended September 30, 2022 of $28,480,000. This decrease was primarily due to the fluctuations in foreign currency exchange rates and our cost-cutting measures during the six months ended September 30, 2023 as compared with the six months ended September 30, 2022.
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Sales and Marketing. Our sales and marketing expenses for the six months ended September 30, 2023 were $11,107,000, which represents a decrease of $501,000, or 4.3%, from the six months ended September 30, 2022 of $11,608,000. This decrease was primarily due to our cost-cutting measures, which included (i) $355,000 of decreased employee-related expenses, (ii) $228,000 of decreased marketing and advertising expenses, and (iii) $121,000 of decreased trade shows. These decreases were partially offset by $304,000 of increased commissions due to higher sales.
Research and Development. Our research and development expenses for the six months ended September 30, 2023 were $4,813,000, which represents a decrease of $970,000, or 16.8%, from the six months ended September 30, 2022 of $5,783,000. This decrease was primarily due to our cost-cutting measures which included head count reduction and a reduction in other research and development expenses.
Foreign Exchange Impact of Lease Liabilities and Forward Contracts. Our foreign exchange impact of lease liabilities and forward contracts for the six months ended September 30, 2023 and 2022 were non-cash losses of $490,000 and $1,760,000, respectively. This change during the six months ended September 30, 2023 as compared with the six months ended September 30, 2022 was primarily due to (i) the remeasurement of our foreign currency-denominated lease liabilities, which resulted in a non-cash gain of $1,822,000 compared with a non-cash loss of $1,021,000, respectively, due to foreign currency exchange rate fluctuations and (ii) the forward foreign currency exchange contracts, which resulted in non-cash losses of $2,312,000 and $739,000, respectively, due to the changes in their fair values.
Operating Income
Consolidated Operating Income. Our consolidated operating income for the six months ended September 30, 2023 was $24,378,000, which represents an increase of $15,191,000, or 165.4%, from the six months ended September 30, 2022 of $9,187,000, increased primarily due to higher sales, higher gross profit, and lower operating expenses as discussed above.
Interest Expense
Interest Expense, net. Our interest expense for the six months ended September 30, 2023 was $27,103,000, which represents an increase of $10,899,000, or 67.3%, from interest expense for the six months ended September 30, 2022 of $16,204,000. This increase was primarily due to higher interest rates on our borrowing and accounts receivable discount programs, which have variable interest rates. Interest expense for the six months ended September 30, 2023 was further impacted by non-cash interest expense incurred on the Convertible Notes issued on March 31, 2023.
Change in Fair Value of Compound Net Derivative Liability
Change in Fair Value of Compound Net Derivative Liability. Our change in fair value of compound net derivative liability for the six months ended September 30, 2023 was a non-cash loss of $530,000 associated with the convertible notes.
Loss on Extinguishment of Debt
Loss on Extinguishment of Debt. Our loss on extinguishment of debt was $168,000 in connection with the repayment of the remaining outstanding balance of our term loans during the six months ended September 30, 2023.
Provision for Income Taxes
Income Tax. We recorded an income tax benefit of $55,000, or an effective tax rate of 1.6%, and $325,000, or an effective tax rate of 4.6%, for the six months ended September 30, 2023 and 2022, respectively. Effective tax rates are based on current annual projections and any changes in future periods could result in an effective tax rate that is materially different from the current estimate. The effective tax rate for the six months ended September 30, 2023, was primarily impacted by (i) non-deductible executive compensation under Internal Revenue Code Section 162(m), (ii) the portion of book expense related to convertible notes and derivatives that is not expected to be deductible for tax, (iii) foreign income taxed at rates that are different from the federal statutory rate, and (iv) specific jurisdictions that we do not expect to recognize the benefit of losses.
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Liquidity and Capital Resources
Overview
We had working capital (current assets minus current liabilities) of $163,243,000 and $154,886,000, a ratio of current assets to current liabilities of 1.4:1.0, at September 30, 2023 and March 31, 2023, respectively. Our working capital increased as we managed the use of our accounts receivable discount programs and timing of vendor payments in connection with our inventory purchases.
We have $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, converted into shares of our common stock, or a combination thereof, at our election. The convertible notes will mature on March 30, 2029, unless earlier converted, repurchased or redeemed.
Our primary source of liquidity was from the use of our accounts receivable discount programs and credit facility during the six months ended September 30, 2023. We believe our cash and cash equivalents, use of accounts receivable discount programs, amounts available under our credit facility, and other sources are sufficient to satisfy our expected future working capital needs, and lease and capital expenditure obligations over the next 12 months.
Share Repurchase Program
In August 2018, our board of directors approved an increase in our share repurchase program from $20,000,000 to $37,000,000 of our common stock. As of September 30, 2023, $18,745,000 had been utilized and $18,255,000 remains available to repurchase shares under the authorized share repurchase program, subject to the limit in our credit facility. We retired the 837,007 shares repurchased under this program through September 30, 2023. Our share repurchase program does not obligate us to acquire any specific number of shares and shares may be repurchased in privately negotiated and/or open market transactions.
Cash Flows
The following summarizes cash flows as reflected in the condensed consolidated statements of cash flows:

|  | Six Months Ended September 30, |
|  | 2023 |  |  | 2022 |
Cash flows (used in) provided by: |  |  |  |  |  |
Operating activities |  | $ | (5,170,000 | ) |  | $ | (16,954,000 | )
Investing activities |  |  | (108,000 | ) |  |  | (2,817,000 | )
Financing activities |  |  | 4,008,000 |  |  |  | 4,689,000 |
Effect of exchange rates on cash and cash equivalents |  |  | (33,000 | ) |  |  | (323,000 | )
Net decrease in cash and cash equivalents |  | $ | (1,303,000 | ) |  | $ | (15,405,000 | )
Additional selected cash flow data: |  |  |  |  |  |  |  |
Depreciation and amortization |  | $ | 5,966,000 |  |  | $ | 6,214,000 |
Capital expenditures |  |  | 169,000 |  |  |  | 2,644,000 |

Net cash used in operating activities was $5,170,000 and $16,954,000 during the six months ended September 30, 2023 and 2022, respectively. The change in our operating activities reflects (i) the increase in our accounts receivable balances as we managed the use of accounts receivable discount programs, (ii) a less significant increase in inventory during the current year as compared with the prior year, and (iii) increased operating results (net income plus the net add-back for non-cash transactions in earnings).
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Net cash used in investing activities was $108,000 and $2,817,000 during the six months ended September 30, 2023 and 2022, respectively. The change in our investing activities primarily resulted from decreased capital expenditures.
Net cash provided by financing activities was $4,008,000 and $4,689,000 during the six months ended September 30, 2023 and 2022, respectively. The change in our financing activities primarily resulted from payments of debt issuance costs in connection with the convertible notes and the amendment to our credit facility, which allowed us to repay the remaining outstanding balance of our term loans, partially offset by an increase in net borrowing under our credit facility as we managed the use of our accounts receivable discount programs to reduce overall interest expense during the six months ended September 30, 2023.
Capital Resources
Credit Facility
We are party to a $268,620,000 senior secured financing (as amended from time to time, the “Credit Facility”) consisting of a $238,620,000 revolving loan facility (the “Revolving Facility”), subject to certain restrictions, and a $30,000,000 term loan facility (the “Term Loans”). The loans under the Credit Facility mature on May 28, 2026 and the lenders have a security interest in substantially all of our assets.
On August 3, 2023, we entered into a seventh amendment to the Credit Facility, which among other things, (i) permitted us to repay our outstanding balance of Term Loans, (ii) permitted the exclusion of quarterly principal payments of Term Loans from the fixed charge coverage ratio (including retrospectively for the prior periods) for all quarters beginning June 30, 2023, (iii) reset the fixed charge coverage ratio financial covenant level for the quarters ending September 30, 2023 and December 31, 2023, (iv) eliminated the senior leverage ratio financial covenant effective with the quarter ended June 30, 2023, (v) extended the minimum undrawn availability financial covenant through the delivery of the June 30, 2024 compliance certificate, and (vi) excluded the amount of all amendment fees and expenses incurred in connection with this amendment as well as prior unamortized fees associated with the Term Loans from bank EBITDA and the fixed charge coverage ratio financial covenant.
On August 3, 2023, we repaid the remaining outstanding balance of our Term Loans and recorded a loss on extinguishment of debt for the remaining unamortized debt issuance costs of $168,000 in the condensed consolidated statement of operations.
The Credit Facility, as amended, requires us to maintain a minimum fixed charge coverage ratio and a specified minimum undrawn availability. We were in compliance these covenants as of September 30, 2023.
We had $165,000,000 and $145,200,000 outstanding under the Revolving Facility at September 30, 2023 and March 31, 2023, respectively. In addition, $6,370,000 was outstanding for letters of credit at September 30, 2023. At September 30, 2023, after certain contractual adjustments, $67,250,000 was available under the Revolving Facility. The interest rate on the Company’s Revolving Facility was 8.68% and 8.13% respectively, at September 30, 2023 and March 31, 2023, respectively.
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.
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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 September 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 September 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 $11,300,000 and $10,400,000, and an asset of $2,340,000 and $1,970,000 at September 30, 2023 and March 31, 2023, respectively. During the three and six months ended September 30, 2023, we recorded $390,000 and $530,000, respectively, as the change in fair value of the Compound Net Derivative Liability in the condensed consolidated statement of operations and condensed consolidated statement of cash flows.
The Convertible Notes also contain additional features, such as, default interest and options related to a fundamental transaction, which were not separately accounted for as the value of such features were not material at September 30, 2023 and March 31, 2023.
Accounts Receivable Discount Programs
We use accounts 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.
The following is a summary of the accounts receivable discount programs:

|  | Six Months Ended September 30, |
|  | 2023 |  |  | 2022 |
Receivables discounted |  | $ | 255,303,000 |  |  | $ | 283,359,000 |
Weighted average number of days collection was accelerated |  |  | 338 |  |  |  | 327 |
Annualized weighted average discount rate |  |  | 6.6 | % |  |  | 4.4 | %
Amount of discount recognized as interest expense |  | $ | 15,940,000 |  |  | $ | 11,293,000 |

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Capital Expenditures and Commitments
Capital Expenditures
Our total capital expenditures, including finance leases and non-cash capital expenditures were $315,000 and $2,792,000 for the six months ended September 30, 2023 and 2022, respectively. These capital expenditures primarily include the purchase of equipment for our operations. We expect to incur approximately $4,000,000 of capital expenditures during fiscal 2024 to support our operations. We have used and expect to continue using our working capital and additional capital lease obligations to finance these capital expenditures.
Related Party Transactions
Lease
In December 2022, we entered into an operating lease for our 35,000 square foot manufacturing, warehouse, and office facility in Ontario, Canada, with a company co-owned by a member of management. The lease, which commenced January 1, 2023, 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 and $162,000 for the three and six months ended September 30, 2023.
Litigation
We are subject to various lawsuits and claims. In addition, government agencies and self-regulatory organizations have the ability to conduct periodic examinations of and administrative proceedings regarding our business, and our compliance with law, code, and regulations related to all matters including but not limited to environmental, information security, taxes, levies, tariffs and such.
Critical Accounting Policies
There have been no material changes to our critical accounting policies and estimates that are presented in our Annual Report on Form 10-K for the year ended March 31, 2023, which was filed on June 14, 2023.

Item 3. | Quantitative and Qualitative Disclosures About Market Risk

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

Item 4. | Controls and Procedures

Evaluation of Disclosure Controls and Procedures
We have established disclosure controls and procedures designed to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and that such information is accumulated and communicated to management, including our chief executive officer, chief financial officer, and chief accounting officer, as appropriate to allow timely decisions regarding required disclosures.
Under the supervision and with the participation of management, including our chief executive officer, chief financial officer, and chief accounting officer, we have conducted an evaluation of the effectiveness of our disclosure controls and procedures as defined in Exchange Act Rules 13a-15(e) and 15d-15(e). Based on this evaluation, our chief executive officer, chief financial officer, and chief accounting officer concluded that MPA’s disclosure controls and procedures were effective as of September 30, 2023.
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Inherent Limitations on Effectiveness of Controls
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Exchange Act Rules 13a-15(f) and 15d-15(f).
Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America, applying certain estimates and judgments as required.
Internal control over financial reporting includes those policies and procedures that:
1. Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;
2. Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
3. Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) that occurred during the three months ended September 30, 2023 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

We are subject to various lawsuits and claims. In addition, government agencies and self-regulatory organizations have the ability to conduct periodic examinations of and administrative proceedings regarding our business, and our compliance with law, code, and regulations related to all matters including but not limited to environmental, information security, taxes, levies, tariffs and such.

Item 1A. | Risk Factors

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

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

Limitation on Payment of Dividends and Share Repurchases
The Credit Facility currently permits the payment of up to $30,000,000 of dividends and share repurchases for fiscal year 2024, subject to pro forma compliance with amended financial covenants.
Purchases of Equity Securities by the Issuer
Shares repurchased during the three months ended September 30, 2023 were as follows:

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

| (1) | As of September 30, 2023, $18,745,000 had been utilized and $18,255,000 remains available to repurchase shares under the authorized share repurchase program, subject to the limit in our Credit Facility. We retired the 837,007 shares repurchased under this program through September 30, 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

(a) | None.

(b) | None.

(c) | During the quarter ended September 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.

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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 |  | Incorporated by reference to Exhibit 3.3 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 1997.
3.4 |  | Amendment to Certificate of Incorporation of the Company |  | Incorporated by reference to Exhibit 3.4 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 1998 (the “1998 Form 10-K”).
3.5 |  | Amendment to Certificate of Incorporation of the Company |  | Incorporated by reference to Exhibit C to the Company’s proxy statement on Schedule 14A filed with the SEC on November 25, 2003.
3.6 |  | Amended and Restated By-Laws of Motorcar Parts of America, Inc. |  | Incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K filed on August 24, 2010.
3.7 |  | Certificate of Amendment of the Certificate of Incorporation of the Company |  | Incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K filed on April 17, 2014.
3.8 |  | Amendment to the Amended and Restated By-Laws of Motorcar Parts of America, Inc., as adopted on June 9, 2016 |  | Incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K filed on June 14, 2016.
3.9 |  | Amendment to the Amended and Restated By-Laws of the Company |  | Incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K filed on February 22, 2017.
3.10 |  | Third Amendment to the Amended and Restated By-Laws of Motorcar Parts of America, Inc., as adopted on January 26, 2022 |  | Incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K filed on February 1, 2022.
4.1 |  | Description of the Registrant’s Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934 |  | 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 |  | Incorporated by reference to Appendix A to the Proxy Statement on Schedule 14A for the 2004 Annual Shareholders Meeting.
4.3 |  | 2010 Incentive Award Plan |  | Incorporated by reference to Appendix A to the Proxy Statement on Schedule 14A filed on December 15, 2010.
4.4 |  | Amended and Restated 2010 Incentive Award Plan |  | Incorporated by reference to Appendix A to the Proxy Statement on Schedule 14A filed on March 5, 2013.

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Number |  | Description of Exhibit |  | Method of Filing
4.5 |  | Second Amended and Restated 2010 Incentive Award Plan |  | Incorporated by reference to Appendix A to the Proxy Statement on Schedule 14A filed on March 3, 2014.
4.6 |  | 2014 Non-Employee Director Incentive Award Plan |  | Incorporated by reference to Appendix B to the Proxy Statement on Schedule 14A filed on March 3, 2014.
4.7 |  | Third Amended and Restated 2010 Incentive Award Plan |  | Incorporated by reference to Appendix A to the Proxy Statement on Schedule 14A filed on November 20, 2017.
4.8 |  | Fourth Amended and Restated 2010 Incentive Award Plan |  | Incorporated by reference to Appendix A to the Proxy Statement on Schedule 14A filed on July 24, 2020.
4.9 |  | 2022 Incentive Award Plan |  | Incorporated by reference to Appendix A to the Proxy Statement on Schedule 14A filed on July 29, 2022.
4.10 |  | Form of Convertible Promissory Note |  | Incorporated 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 Warrant |  | Incorporated 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 Note |  | Incorporated 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 Warrant |  | Incorporated 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 agent |  | Incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q filed on August 9, 2023.
10.2 |  | Second Amendment to the Note Purchase Agreement |  | Incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q filed on August 9, 2023.
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.

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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) |  |

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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: November 9, 2023 | By: | /s/ David Lee |
|  | David Lee
|  | Chief Financial Officer
Dated: November 9, 2023 | By: | /s/ Kamlesh Shah |
|  | Kamlesh Shah
|  | Chief Accounting Officer

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