MOTORCAR PARTS OF AMERICA INC 10-Q

Item 1. Financial Statements MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets June 30, 2022 March 31, 2022 ASSETS (Unaudited) Current assets: Cash and cash equivalents $ 9,217,000 $ 23,016,000 Short-term investments 1,995,000 2,202,000 Accounts receivable — net 73,030,000 85,075,000 Inventory 405,205,000 385,504,000 Contract assets 27,783,000 27,500,000 Prepaid expenses and other current assets 11,705,000 13,688,000 Total current assets 528,935,000 536,985,000 Plant and equipment — net 49,384,000 51,062,000 Operating lease assets 80,157,000 81,997,000 Long-term deferred income taxes 27,046,000 26,982,000 Long-term contract assets 306,953,000 310,255,000 Goodwill and intangible assets — net 6,548,000 7,004,000 Other assets 1,403,000 1,413,000 TOTAL ASSETS $ 1,000,426,000 $ 1,015,698,000 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Accounts payable and accrued liabilities $ 173,818,000 $ 168,435,000 Customer finished goods returns accrual 28,793,000 38,086,000 Contract liabilities 43,645,000 42,496,000 Revolving loan 146,000,000 155,000,000 Other current liabilities 11,279,000 11,930,000 Operating lease liabilities 6,653,000 6,788,000 Current portion of term loan 3,670,000 3,670,000 Total current liabilities 413,858,000 426,405,000 Term loan, less current portion 12,097,000 13,024,000 Long-term contract liabilities 173,045,000 172,764,000 Long-term deferred income taxes 121,000 126,000 Long-term operating lease liabilities 79,552,000 80,803,000 Other liabilities 6,987,000 7,313,000 Total liabilities 685,660,000 700,435,000 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; 19,214,978 and 19,104,751 shares issued and outstanding at June 30 , 2022 and March 31 , 2022 , respectively 192,000 191,000 Additional paid-in capital 227,729,000 227,184,000 Retained earnings 92,779,000 92,954,000 Accumulated other comprehensive loss ( 5,934,000 ) ( 5,066,000 ) Total shareholders’ equity 314,766,000 315,263,000 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 1,000,426,000 $ 1,015,698,000 The accompanying notes to condensed consolidated financial statements are an integral part hereof. 4 Table of Contents MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Operations (Unaudited) Three Months Ended June 30, 2022 2021 Net sales $ 163,985,000 $ 149,034,000 Cost of goods sold 133,683,000 125,463,000 Gross profit 30,302,000 23,571,000 Operating expenses: General and administrative 13,634,000 12,486,000 Sales and marketing 5,542,000 5,368,000 Research and development 3,113,000 2,501,000 Foreign exchange impact of lease liabilities and forward contracts 678,000 ( 2,533,000 ) Total operating expenses 22,967,000 17,822,000 Operating income 7,335,000 5,749,000 Interest expense, net 6,921,000 3,941,000 Income before income tax expense 414,000 1,808,000 Income tax expense 589,000 947,000 Net (loss) income $ ( 175,000 ) $ 861,000 Basic net (loss) income per share $ ( 0.01 ) $ 0.05 Diluted net (loss) income per share $ ( 0.01 ) $ 0.04 Weighted average number of shares outstanding: Basic 19,123,354 19,054,481 Diluted 19,123,354 19,659,057 The accompanying notes to condensed consolidated financial statements are an integral part hereof. 5 Table of Contents MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Comprehensive (Loss) Income (Unaudited) Three Months Ended June 30, 2022 2021 Net (loss) income $ ( 175,000 ) $ 861,000 Other comprehensive (loss) income, net of tax: Foreign currency translation (loss) gain ( 868,000 ) 1,833,000 Total other comprehensive (loss) income, net of tax ( 868,000 ) 1,833,000 Comprehensive (loss) income $ ( 1,043,000 ) $ 2,694,000 The accompanying notes to condensed consolidated financial statements are an integral part hereof. 6 Table of Contents 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 (Loss) Income 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 Common Stock Shares Amount Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive (Loss) Income Total Balance at March 31, 2021 19,045,386 $ 190,000 $ 223,058,000 $ 85,593,000 $ ( 7,696,000 ) $ 301,145,000 Compensation recognized under employee stock plans - - 1,576,000 - - 1,576,000 Exercise of stock options, net of shares withheld for employee taxes 19,837 - 354,000 - - 354,000 Issuance of common stock upon vesting of RSUs, net of shares withheld for employee taxes 35,869 1,000 ( 543,000 ) - - ( 542,000 ) Foreign currency translation - - - - 1,833,000 1,833,000 Net income - - - 861,000 - 861,000 Balance at June 30, 2021 19,101,092 $ 191,000 $ 224,445,000 $ 86,454,000 $ ( 5,863,000 ) $ 305,227,000 The accompanying notes to condensed consolidated financial statements are an integral part hereof. 7 Table of Contents MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (Unaudited) Three Months Ended June 30, 2022 2021 Cash flows from operating activities: Net (loss) income $ ( 175,000 ) $ 861,000 Adjustments to reconcile net (loss) income to net cash used in operating activities: Depreciation and amortization 3,124,000 3,145,000 Amortization of interest 306,000 414,000 Amortization of core premiums paid to customers 2,863,000 2,531,000 Amortization of finished goods premiums paid to customers 181,000 146,000 Noncash lease expense 1,939,000 1,791,000 Gain due to the change in the fair value of the contingent consideration - ( 60,000 ) Foreign exchange impact of lease liabilities and forward contracts 678,000 ( 2,533,000 ) Loss (gain) on short-term investments 294,000 ( 5,000 ) Net provision for inventory reserves 3,942,000 3,141,000 Net provision for customer payment discrepancies and credit losses 300,000 229,000 Deferred income taxes ( 62,000 ) 358,000 Share-based compensation expense 1,249,000 1,576,000 Loss on disposal of plant and equipment 9,000 33,000 Changes in operating assets and liabilities: Accounts receivable 11,427,000 9,020,000 Inventory ( 24,252,000 ) ( 20,625,000 ) Prepaid expenses and other current assets 1,122,000 281,000 Other assets 6,000 297,000 Accounts payable and accrued liabilities 5,898,000 ( 10,183,000 ) Customer finished goods returns accrual ( 9,289,000 ) 3,698,000 Contract assets, net ( 37,000 ) ( 24,857,000 ) Contract liabilities, net 1,384,000 27,880,000 Operating lease liabilities ( 1,446,000 ) ( 1,259,000 ) Other liabilities ( 443,000 ) ( 618,000 ) Net cash used in operating activities ( 982,000 ) ( 4,739,000 ) Cash flows from investing activities: Purchase of plant and equipment ( 1,375,000 ) ( 1,922,000 ) Purchase of short-term investments ( 86,000 ) ( 167,000 ) Net cash used in investing activities ( 1,461,000 ) ( 2,089,000 ) Cash flows from financing activities: Borrowings under revolving loan 13,000,000 32,000,000 Repayments of revolving loan ( 22,000,000 ) ( 13,000,000 ) Repayments of term loan ( 938,000 ) ( 938,000 ) Payments for debt issuance costs ( 21,000 ) ( 1,102,000 ) Payments on finance lease obligations ( 604,000 ) ( 678,000 ) Exercise of stock options 191,000 354,000 Cash used to net share settle equity awards ( 894,000 ) ( 542,000 ) Net cash (used in) provided by financing activities ( 11,266,000 ) 16,094,000 Effect of exchange rate changes on cash and cash equivalents ( 90,000 ) 94,000 Net (decrease) increase in cash and cash equivalents ( 13,799,000 ) 9,360,000 Cash and cash equivalents — Beginning of period 23,016,000 15,523,000 Cash and cash equivalents — End of period $ 9,217,000 $ 24,883,000 Supplemental disclosures of cash flow information: Cash paid for interest, net $ 6,548,000 $ 3,521,000 Cash paid for income taxes, net of refunds 712,000 1,550,000 Cash paid for operating leases 2,647,000 2,472,000 Cash paid for finance leases 672,000 775,000 Plant and equipment acquired under finance leases 75,000 230,000 Assets acquired under operating leases 144,000 15,718,000 Non-cash capital expenditures 401,000 206,000 The accompanying notes to condensed consolidated financial statements are an integral part hereof. 8 Table of Contents MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements June 30, 2022 (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) 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, and brake master cylinders, and (iv) other products, which include (a) turbochargers and (b) test solutions and diagnostic equipment used for electric vehicle powertrain development and manufacturing including electric motor test systems, e-axle test systems, advanced power emulators, charging unit test systems, test systems for alternators and starters, belt starter generators, bench-top testers, and specialized test services for electric vehicle inverters. Pursuant to the guidance provided under the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) for segment reporting, the Company has identified its chief operating decision maker (“CODM”), reviewed the documents used by the CODM, and understands how such documents are used by the CODM to make financial and operating decisions. The Company has determined through this review process that its business comprises three separate operating segments. The operating segments meet all the criteria to be aggregated and are presented as such. Impact of the Novel Coronavirus (“COVID-19”) The outbreak of the COVID-19 pandemic continues to adversely impact the U.S. and global economies – creating uncertainty regarding the potential effects on the Company’s employees, supply chain, operations, and customer demand. The COVID-19 pandemic could impact the Company’s operations and the operations of its customers, suppliers, and vendors because of quarantines, facility closures, travel, and logistics restrictions. The extent to which the COVID-19 pandemic impacts the Company will depend on numerous factors and future developments, which are highly uncertain and cannot be predicted, including, but not limited to: (i) the severity of the virus, (ii) the occurrence and duration of additional spikes in infections, (iii) the effects of the pandemic on customers, suppliers, and vendors, (iv) the remedial actions and stimulus measures adopted by local, state and federal governments, (v) the availability and acceptance of vaccines, and (vi) the extent to which normal economic and operating conditions can resume. Even after the COVID-19 pandemic has subsided, the Company may continue to experience adverse impacts to its business because of an economic recession or depression that has occurred or may occur in the future. 2. Basis of Presentation and New Accounting Pronouncements Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended June 30, 2022 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2023. This report should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the fiscal year ended March 31, 2022, which are included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on June 14, 2022. 9 Table of Contents The accompanying condensed consolidated financial statements have been prepared on a consistent basis with, and there have been no material changes to the accounting policies described in Note 2 , Summary of Significant Accounting Policies, to the consolidated financial statements that are presented in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2022. 3. Accounts Receivable — Net The Company has trade accounts receivable that result from the sale of goods and services. Accounts receivable — net includes offset accounts related to allowances for credit losses, customer payment discrepancies, and returned goods authorizations (“RGAs”) issued for in-transit unit returns. The Company believes its credit risk with respect to trade accounts receivable is limited due to its credit evaluation process and the long-term nature of its relationships with its largest customers. The Company utilizes a historical loss rate method, adjusted for any changes in economic conditions or risk characteristics, to estimate its expected credit losses each period. When developing an estimate of expected credit losses, the Company considers all available relevant information regarding the collectability of cash flows, including historical information, current conditions, and reasonable and supportable forecasts of future economic conditions over the contractual life of the receivable. The historical loss rate method considers past write-offs of trade accounts receivable over a period commensurate with the initial term of the Company’s contracts with its customers. The Company recognizes the allowance for credit losses at inception and reassesses quarterly based on management’s expectation of the asset’s collectability. The Company’s accounts receivable are short-term in nature and written off only when all collection attempts have failed. The Company uses receivable discount programs with certain customers and their respective banks (see Note 10). Accounts receivable — net is comprised of the following: June 30, 2022 March 31, 2022 Accounts receivable — trade $ 94,087,000 $ 98,734,000 Allowance for credit losses ( 231,000 ) ( 375,000 ) Customer payment discrepancies ( 1,418,000 ) ( 1,375,000 ) Customer returns RGA issued ( 19,408,000 ) ( 11,909,000 ) Total accounts receivable — net $ 73,030,000 $ 85,075,000 The following table provides a roll-forward of the allowance for credit losses that is deducted from accounts receivable to present the net amount expected to be collected. Three Months Ended June 30, 2022 2021 Balance at beginning of period $ 375,000 $ 348,000 Provision for expected credit losses 12,000 ( 36,000 ) Recoveries - - Amounts written off charged against the allowance ( 156,000 ) ( 39,000 ) Balance at end of period $ 231,000 $ 273,000 10 Table of Contents 4. Inventory Inventory is comprised of the following: June 30, 2022 March 31, 2022 Inventory Raw materials $ 146,775,000 $ 150,414,000 Work-in-process 6,357,000 6,880,000 Finished goods 248,332,000 226,729,000 401,464,000 384,023,000 Less allowance for excess and obsolete inventory ( 12,704,000 ) ( 13,520,000 ) Inventory — net 388,760,000 370,503,000 Inventory unreturned 16,445,000 15,001,000 Total inventory $ 405,205,000 $ 385,504,000 5. Contract Assets During the three months ended June 30, 2022 and 2021, the Company reduced the carrying value of Remanufactured Cores held at customers’ locations by $ 572,000 and $ 984,000 , respectively. Contract assets are comprised of the following: June 30, 2022 March 31, 2022 Short-term contract assets Cores expected to be returned by customers $ 16,658,000 $ 15,778,000 Upfront payments to customers 460,000 517,000 Finished goods premiums paid to customers 573,000 584,000 Core premiums paid to customers 10,092,000 10,621,000 Total short-term contract assets $ 27,783,000 $ 27,500,000 Remanufactured cores held at customers’ locations $ 257,379,000 $ 258,376,000 Upfront payments to customers 122,000 210,000 Finished goods premiums paid to customers 2,685,000 2,806,000 Core premiums paid to customers 41,198,000 43,294,000 Long-term core inventory deposits 5,569,000 5,569,000 Total long-term contract assets $ 306,953,000 $ 310,255,000 6. Significant Customer and Other Information Significant Customer Concentrations The largest customers accounted for the following percentage of net sales: Three Months Ended June 30, 2022 2021 Net sales Customer A 37 % 34 % Customer B 25 % 20 % Customer C 20 % 31 % 11 Table of Contents The largest customers accounted for the following percentage of accounts receivable – trade: June 30, 2022 March 31,2022 Accounts receivable - trade Customer A 43 % 42 % Customer B 22 % 21 % Customer C - % 9 % Geographic and Product Information The Company’s products are sold predominantly in the U.S. and accounted for the following percentages of net sales: Three Months Ended June 30, 2022 2021 Product line Rotating electrical products 67 % 67 % Wheel hub products 12 % 14 % Brake-related products 17 % 16 % Other products 4 % 3 % 100 % 100 % Significant Supplier Concentrations The Company had no suppliers that accounted for more than 10% of inventory purchases for the three months ended June 30, 2022 and 2021, respectively. 7. Debt The Company is party to a $ 268,620,000 senior secured financing, (as amended from time to time, the “Credit Facility”) with a syndicate of lenders and PNC Bank, National Association, as administrative agent, consisting of (i) a $ 238,620,000 revolving loan facility, subject to borrowing base restrictions, a $ 24,000,000 sublimit for borrowings by Canadian borrowers, and a $ 20,000,000 sublimit for letters of credit (the “Revolving Facility”) and (ii) a $ 30,000,000 term loan facility (the “Term Loans”). The loans under the Credit Facility mature on May 28, 2026 . The Credit Facility currently permits the payment of up to $ 29,043,000 of dividends and share repurchases for fiscal year 2023, subject to pro forma compliance with financial covenants. In connection with the Credit Facility, the lenders have a security interest in substantially all of the assets of the Company. The Term Loans require quarterly principal payments of $ 937,500 . The Credit Facility bears interest at rates equal to either LIBOR plus a margin of 2.25 %, 2.50 % or 2.75 % or a reference rate plus a margin of 1.25 %, 1.50 % or 1.75 %, in each case depending on the senior leverage ratio as of the applicable measurement date. There is also a facility fee of 0.375 % to 0.50 %, depending on the senior leverage ratio as of the applicable measurement date. The interest rate on the Company’s Term Loans and Revolving Facility was 3.82 % and 4.20 % respectively, at June 30, 2022 , and 2.99 % and 3.13 % respectively, at March 31, 2022 . The Credit Facility, among other things, requires the Company to maintain certain financial covenants including a maximum senior leverage ratio and a minimum fixed charge coverage ratio. The Company was in compliance with all financial covenants at June 30, 2022. In addition to other covenants, the Credit Facility places limits on the Company’s ability to incur liens, incur additional indebtedness, make loans and investments, engage in mergers and acquisitions, engage in asset sales, redeem, or repurchase capital stock, alter the business conducted by the Company and its subsidiaries, transact with affiliates, prepay, redeem, or purchase subordinated debt, and amend or otherwise alter debt agreements. 12 Table of Contents The following summarizes information about the Term Loans: June 30, 2022 March 31, 2022 Principal amount of Term Loans $ 15,937,000 $ 16,875,000 Unamortized financing fees ( 170,000 ) ( 181,000 ) Net carrying amount of Term Loans 15,767,000 16,694,000 Less current portion of Term Loans ( 3,670,000 ) ( 3,670,000 ) Long-term portion of Term Loans $ 12,097,000 $ 13,024,000 Future repayments of the Term Loans are as follows: Year Ending March 31, 2023 - remaining nine months $ 2,812,000 2024 3,750,000 2025 3,750,000 2026 3,750,000 2027 1,875,000 Total payments $ 15,937,000 The Company had $ 146,000,000 and $ 155,000,000 outstanding under the Revolving Facility at June 30, 2022 and March 31, 2022 , respectively. In addition, $ 6,370,000 was outstanding for letters of credit at June 30, 202 2. At June 30, 2022 , after certain contractual adjustments, $ 86,250,000 was available under the Revolving Facility. 8. Contract Liabilities Contract liabilities are comprised of the following: June 30, 2022 March 31, 2022 Short-term contract liabilities Customer core returns accruals $ 17,533,000 $ 12,322,000 Customer allowances earned 18,698,000 22,018,000 Customer deposits 2,507,000 3,306,000 Finished goods liabilities 1,582,000 1,537,000 Core bank liability 1,647,000 1,634,000 Accrued core payment 1,678,000 1,679,000 Total short-term contract liabilities $ 43,645,000 $ 42,496,000 Long-term contract liabilities Customer core returns accruals $ 156,153,000 $ 154,940,000 Customer allowances earned - 41,000 Finished goods liabilities 1,202,000 1,588,000 Core bank liability 14,851,000 15,267,000 Accrued core payment 839,000 928,000 Total long-term contract liabilities $ 173,045,000 $ 172,764,000 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. 13 Table of Contents In connection with the remeasurement of these leases, the Company recorded gains of $ 20,000 and $ 2,795,000 during the three months ended June 30, 2022 and 2021, respectively . These amounts are included in “foreign exchange impact of lease liabilities and forward contracts” in the condensed consolidated statements of operations. Balance sheet information for leases is as follows: Leases Classification June 30, 2022 March 31, 2022 Assets: Operating Operating lease assets $ 80,157,000 $ 81,997,000 Finance Plant and equipment 7,027,000 7,470,000 Total leased assets $ 87,184,000 $ 89,467,000 Liabilities: Current Operating Operating lease liabilities $ 6,653,000 $ 6,788,000 Finance Other current liabilities 2,185,000 2,330,000 Long-term Operating Long-term operating lease liabilities 79,552,000 80,803,000 Finance Other liabilities 3,035,000 3,425,000 Total lease liabilities $ 91,425,000 $ 93,346,000 Lease cost recognized in the condensed consolidated statements of operations is as follows: Three Months Ended June 30, 2022 2021 Lease cost Operating lease cost $ 3,165,000 $ 3,042,000 Short-term lease cost 454,000 376,000 Variable lease cost 185,000 281,000 Finance lease cost: Amortization of finance lease assets 539,000 499,000 Interest on finance lease liabilities 68,000 97,000 Total lease cost $ 4,411,000 $ 4,295,000 Maturities of lease commitments at June 30, 2022 by fiscal year were as follows: Maturity of lease liabilities Operating Leases Finance Leases Total 2023 - remaining nine months $ 8,804,000 $ 1,884,000 $ 10,688,000 2024 10,073,000 1,762,000 11,835,000 2025 10,143,000 1,263,000 11,406,000 2026 10,358,000 570,000 10,928,000 2027 10,496,000 106,000 10,602,000 Thereafter 64,621,000 5,000 64,626,000 Total lease payments 114,495,000 5,590,000 120,085,000 Less amount representing interest ( 28,290,000 ) ( 370,000 ) ( 28,660,000 ) Present value of lease liabilities $ 86,205,000 $ 5,220,000 $ 91,425,000 14 Table of Contents Other information about leases is as follows: June 30, 2022 March 31, 2022 Lease term and discount rate Weighted-average remaining lease term (years): Finance leases 2.8 2.9 Operating leases 10.2 10.4 Weighted-average discount rate: Finance leases 5.1 % 5.1 % Operating leases 5.7 % 5.7 % 10. Accounts Receivable Discount Programs The Company uses receivable discount programs with certain customers and their respective banks. Under these programs, the Company may sell those customers’ receivables to those banks at a discount to be agreed upon at the time the receivables are sold. These discount arrangements allow the Company to accelerate receipt of payment on customers’ receivables. The following is a summary of accounts receivable discount programs: Three Months Ended June 30, 2022 2021 Receivables discounted $ 142,624,000 $ 146,669,000 Weighted average days 327 329 Annualized weighted average discount rate 3.7 % 1.8 % Amount of discount recognized as interest expense $ 4,874,000 $ 2,473,000 11. Net (Loss) Income per Share Basic net (loss) income per share is computed by dividing net (loss) income by the weighted average number of shares of common stock outstanding during the period. Diluted net (loss) income per share includes the effect, if any, from the potential exercise or conversion of securities, such as stock options, which would result in the issuance of incremental shares of common stock to the extent such impact is not anti-dilutive. The following presents a reconciliation of basic and diluted net (loss) income per share: Three Months Ended June 30, 2022 2021 Net (loss) income $ ( 175,000 ) $ 861,000 Basic shares 19,123,354 19,054,481 Effect of potentially dilutive securities - 604,576 Diluted shares 19,123,354 19,659,057 Net (loss) income per share: Basic net (loss) income per share $ ( 0.01 ) $ 0.05 Diluted net (loss) income per share $ ( 0.01 ) $ 0.04 Potential common shares that would have the effect of increasing diluted net income per share or decreasing diluted net loss per share are considered to be anti-dilutive and as such, these shares are not included in calculating diluted net (loss) income per share. For the three months ended June 30, 2022 and 2021 , there were 2,301,901 and 634,832 , respectively, of potential common shares not included in the calculation of diluted net (loss) income per share because their effect was anti-dilutive. 15 Table of Contents 12. Income Taxes The Company recorded income tax expense of $ 589,000 , or an effective tax rate of 142.3 %, and $ 947,000 , or an effective tax rate of 52.4 %, for the three months ended June 30, 2022 and 2021, respectively. Effective tax rates are based on current annual projections and any changes in future periods could result in an effective tax rate that is materially different from the current estimate. The effective tax rate for the three months ended June 30, 2022, was primarily impacted by (i) specific jurisdictions that the Company does not expect to recognize the benefit of losses, (ii) foreign income taxed at rates that are different from the federal statutory rate, and (iii) non-deductible executive compensation under Internal Revenue Code Section 162(m). The Company and its subsidiaries file income tax returns in the U.S. federal, various state, and foreign jurisdictions with varying statutes of limitations. At June 30, 2022, the Company is not under examination in any jurisdiction, and remain subject to examination from the years ended March 31, 2017. 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 $ 46,450,000 and $ 44,968,000 at June 30, 2022 and March 31, 2022, respectively. These contracts generally have a term of one year or less, at rates agreed at the inception of the contracts. The counterparty to this derivative transaction is a major financial institution with investment grade credit rating; however, the Company is exposed to credit risk with this institution. The credit risk is limited to the potential unrealized gains (which offset currency fluctuations adverse to the Company) in any such contract should this counterparty fail to perform as contracted. Any changes in the fair values of forward foreign currency exchange contracts are included in “foreign exchange impact of lease liabilities and forward contracts” in the condensed consolidated statements of operations. The following shows the effect of derivative instruments on the condensed consolidated statements of operations: Loss Recognized as Foreign Exchange Impact of Lease Liabilities and Forward Contracts Three Months Ended Derivatives Not Designated as June 30, Hedging Instruments 2022 2021 Forward foreign currency exchange contracts $ ( 698,000 ) $ ( 262,000 ) 16 Table of Contents The fair value of the forward foreign currency exchange contracts of $ 415,000 and $ 1,113,000 is included in prepaid expenses and other current assets in the condensed consolidated balance sheets at June 30, 2022 and March 31, 2022, respectively. The changes in the fair values of forward foreign currency exchange contracts are included in “foreign exchange impact of lease liabilities and forward contracts” in the condensed consolidated statements of cash flows for the three months ended June 30, 2022 and 2021. 14. Fair Value Measurements The following summarizes financial assets and liabilities measured at fair value, by level within the fair value hierarchy: June 30, 2022 March 31, 2022 Fair Value Measurements Using Inputs Considered as Fair Value Measurements Using Inputs Considered as Fair Value Level 1 Level 2 Level 3 Fair Value Level 1 Level 2 Level 3 Assets Short-term investments Mutual funds $ 1,995,000 $ 1,995,000 $ - $ - $ 2,202,000 $ 2,202,000 $ - $ - Prepaid expenses and other current assets Forward foreign currency exchange contracts 415,000 - 415,000 - 1,113,000 - 1,113,000 - Liabilities Other current liabilities Deferred compensation 1,995,000 1,995,000 - - 2,202,000 2,202,000 - - 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) . The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their fair value due to the short-term nature of these instruments. The carrying amounts of the revolving loan, term loan and other long-term liabilities approximate their fair value based on the variable nature of interest rates and current rates for instruments with similar characteristics. 15. Share-based Payments Stock Options During the three months ended June 30, 2022 and 2021, no options to purchase shares of the Company’s common stock were granted. 17 Table of Contents The following is a summary of stock option transactions: Number of Shares Weighted Average Exercise Price Outstanding at March 31, 2022 1,695,499 $ 17.53 Granted - $ - Exercised ( 25,543 ) $ 7.46 Forfeited/Cancelled ( 60,723 ) $ 15.73 Expired ( 3,000 ) $ 9.85 Outstanding at June 30, 2022 1,606,233 $ 17.76 At June 30, 2022, options to purchase 197,032 shares of common stock were unvested at a weighted average exercise price of $ 17.25 . At June 30, 2022, there was $ 666,000 of total unrecognized compensation expense related to unvested stock option awards, which will be recognized over the weighted average remaining vesting period of approximately one year . Restricted Stock Units and Restricted Stock Awards (collectively “RSUs”) During the three months ended June 30, 2022 and 2021, the Company granted (i) performance-based restricted stock awards which had a threshold performance level of 33,333 shares, a target performance level of 66,667 shares, and a maximum performance level of 100,000 shares at the grant date for both periods and (ii) 176,590 and 118,673 of time-based vesting restricted stock units, respectively, based on the closing market price on the grant date. The following is a summary of non-vested RSUs: Number of Shares Weighted Average Grant Date Fair Value Outstanding at March 31, 2022 399,063 $ 19.98 Granted 276,590 $ 13.14 Vested ( 149,313 ) $ 20.63 Forfeited/Cancelled ( 41,293 ) $ 20.72 Outstanding at June 30, 2022 485,047 $ 15.82 At June 30, 2022, there was $ 5,818,000 of unrecognized compensation expense related to RSUs, which will be recognized over the weighted average remaining vesting period of approximately 2.0 years. The Company’s unrecognized compensation expense includes restricted stock awards at target performance level. Performance Stock Units (“PSUs”) During the three months ended June 30, 2022 and 2021, the Company granted 126,028 and 84,593 PSUs (at target performance levels), respectively, which typically cliff vest after three-year s subject to continued employment. These awards are contingent and granted separately for each of the following metrics: adjusted EBITDA, net sales, and relative total shareholder return (“TSR”). Compensation cost is determined at the grant date and recognized on a straight-line basis over the requisite service period to the extent the conditions are deemed probable. The number of shares earned at the end of the three-year period will vary, based only on actual performance, from 0 % to 150 % of the target number of PSUs granted. PSUs are not considered issued or outstanding ordinary shares of the Company. Adjusted EBITDA and net sales are considered performance conditions. The Company will reassess the probability of achieving each performance condition separately each reporting period. TSR is considered a market condition because it measures the Company’s return against the performance of the Russell 3000, excluding companies classified as financials and real estate, over a given period of time. Compensation cost related to the TSR award will not be adjusted even if the market condition is not met. 18 Table of Contents The Company calculated the fair value of the PSUs for each component individually. The fair value of PSUs subject to performance conditions is equal to the closing stock price on the grant date. The fair value of PSUs subject to the market condition is determined using the Monte Carlo valuation model. The following table summarizes the assumptions used in determining the fair value of the TSR awards: Three Months Ended June 30, 2022 2021 Risk free interest rate 3.35 % 0.47 % Expected life in years 3 3 Expected volatility of MPA common stock 51.30 % 53.70 % Expected average volatility of peer companies 62.70 % 59.30 % Average correlation coefficient of peer companies 27.50 % 26.70 % Expected dividend yield - - Grant date fair value $ 16.02 $ 26.89 The following is a summary of non-vested PSUs: Number of Shares Weighted Average Grant Date Fair Value Outstanding at March 31, 2022 84,593 $ 23.19 Granted 126,028 $ 14.00 Vested - $ - Forfeited - $ - Outstanding at June 30, 2022 210,621 $ 17.70 At June 30, 2022, there was $ 3,033,000 of unrecognized compensation expense related to these awards, which will be recognized over the weighted average remaining vesting period of approximately 2.5 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. 19 Table of Contents The following summarizes the changes in the warranty return accrual: Three Months Ended June 30, 2022 2021 Balance at beginning of period $ 20,125,000 $ 21,093,000 Charged to expense 30,920,000 27,261,000 Amounts processed ( 33,177,000 ) ( 28,344,000 ) Balance at end of period $ 17,868,000 $ 20,010,000 Contingencies The Company is subject to various lawsuits and claims. In addition, government agencies and self-regulatory organizations have the ability to conduct periodic examinations of and administrative proceedings regarding the Company’s business. Following an audit in fiscal 2019, the U.S. Customs and Border Protection stated that it believed that the Company owed additional duties of approximately $ 17 million from 2011 through mid-2018 relating to products that it imported from Mexico. The Company does not believe that this amount is correct and believes that it has numerous defenses and intends to dispute this amount vigorously. The Company cannot assure that the U.S. Customs and Border Protection will agree or that it will not need to accrue or pay additional amounts in the future. 17. Share Repurchases In August 2018, the Company’s board of directors approved an increase in its share repurchase program from $ 20,000,000 to $ 37,000,000 of its common stock. During the three months ended June 30, 2022, the Company did no t repurchase any shares of its common stock. As of June 30, 2022, $ 18,745,000 was utilized and $ 18,255,000 remains available to repurchase shares under the authorized share repurchase program, subject to the limit in the Company’s Credit Facility. The Company retired the 837,007 shares repurchased under this program through June 30, 2022. 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. 20 Table of Contents