What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-06-14 compared with 2022-06-14 · 396 added, 206 removed, 341 unchanged (64% of the section changed)

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Management Overview

We have a multi-pronged platform for growth within the automotive aftermarket for non-discretionary replacement hard parts and test solutions.

In addition, we offer diagnostic equipment applications focused on the fast-evolving electric mobility

Our investments in infrastructure and human resources during the past few years reflects the significant expansion of manufacturing capacity to support multiple product lines and continues to be transformative and scalable.

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 initial 312,000 square foot

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.

facility in Mexico.

New products introduced through our growth strategies include:

(i) the addition of brake calipers in August 2019;

(ii) alternators and starters for heavy-duty truck, industrial, marine, and agriculture applications, through an acquisition in January 2019;

(iii) brake power boosters in August 2016;

turbochargers through an acquisition in July 2016.

In addition, our test solutions and diagnostic equipment include:

(a) the design and manufacture of test solutions and diagnostic equipment for alternators,

starters, belt-start generators (stop start and hybrid technology), and electric power trains for electric vehicles through an acquisition in July 2017 and (b) the design and manufacture of advanced power emulators (AC and DC) and custom

power electronic products for the automotive and aerospace industries through an acquisition in December 2018.

Highlights and Accomplishments in Fiscal 2023

During fiscal 2022, we accomplished the following significant successes despite ongoing worldwide supply chain and logistics challenges and inflationary pressures:

We achieved organic sales growth of more than 20 percent;

We developed a comprehensive line of brake pads, utilizing an

industry-leading formulation, and brake rotors, serving the professional installer market under our Quality Built ® brand;

We secured multi-year new business commitments and opportunities of more than $100 million, primarily across multiple brake-related products;

We successfully expanded sales through additional product line offerings in Mexico;

We completed a multi-year expansion program of our facilities in Mexico, including completion of a new brake caliper remanufacturing facility;

We added capacity to support anticipated future growth with limited additional capital investment;

We extended the maturity date of our Credit Facility from June 2023 to May 2026 to enhance our liquidity and capital resources;

We secured inventory which enabled us to support our customers, meet demand and obtain new business -- despite worldwide supply chain and logistics challenges;

We secured purchase orders from all major automotive retailers for rotating electric bench-top testing equipment;

We opened an electric vehicle (“EV”) contract testing center in Detroit, Michigan;

We continued a series of prestigious Tier-1 wins for our EV technology with orders from major global automotive, aerospace and research institutions;

Equally important, we continued our social responsibility initiatives with plans to launch an Agri-farm organic food and community program in Mexico and continued our focus on opportunities to enhance our Environmental, Social and Governance practices on a global basis.

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

The COVID-19 pandemic has spread globally and created significant volatility, uncertainty and economic disruption in many countries, including the countries in which we operate.

National, state and local

governments in these countries continue to implement a variety of measures in response that have the effect of restricting or limiting, among other activities, the operations of certain businesses.

We continue to experience disruptions with worldwide supply chain and logistics

We are unable to predict accurately the ultimate long-term impact that COVID-19 will have on our business and financial condition.

While the near-term outlook appears positive, any additional

government shutdowns or the emergence and spread of new variants of the virus, including the Delta or Omicron variant, the likelihood of a resurgence of positive cases, the development, availability and public acceptance of effective treatments

and vaccines, the speed at which such vaccines are administered, the efficacy of current vaccines against evolving strains or variants of the virus, could negatively impact our business and financial condition.

There have been no serious outbreaks in any of our production facilities;

however, a serious outbreak could affect our production capabilities.

We experienced inefficiencies in operations due to the implementation of

additional personnel safety measures throughout our facilities.

Enhanced levels of communication at all levels within the organization are critical to address the ever-changing landscape brought on by COVID-19, especially with most of our office staff continuing to work from home

Such efforts have included, additional board check-in meetings, executive committee meetings, and town hall style communications with all employees, as appropriate.

We continue to incur costs as a result of COVID-19, including employee costs, such as expanded benefits and frontline incentives, and other operating costs associated with the provision of personal protective

equipment, which have negatively impacted our profitability.

These expanded benefits, supply costs and other COVID-19 related costs resulted in total expense, included in cost of goods sold and operating expenses in the consolidated statements of

operations, of $3,368,000 and $7,316,000 during fiscal 2022 and 2021, respectively.

Our Asian subsidiaries received $71,000 and $171,000 from their local assistance programs during fiscal 2022 and 2021, respectively.

We received payments from the

Canadian Government under the Canadian Emergency Wage Subsidy program of $1,130,000 during fiscal 2021.

These payments are recorded as a reduction of cost of goods sold and operating expenses in the consolidated statements of income.

During fiscal 2023, we continued to execute our strategic plan – focusing on meaningful growth and improving profitability by leveraging our offshore infrastructure, industry position and customer relationships.

The following significant

accomplishments support our optimism moving forward:

We achieved record fiscal fourth quarter and full-year sales, which increased 18.8 percent and 5.0 percent, respectively, with solid demand across multiple categories;

We experienced meaningful traction with our customers and consumers since last year’s launch of a comprehensive line of brake pads utilizing an industry-leading formulation, and brake rotors – serving the professional installer market under our Quality-Built ® brand;

We expanded sales with additional product line offerings and customers in Mexico;

We continued to improve efficiencies with expected ongoing benefits through increased production volume and pricing;

We focused on reduction in inventory levels following a strategic build up to meet demand during recent global supply chain challenges;

We enhanced our liquidity and capital resources with a $32 million strategic convertible note investment that supports us at an exciting pivotal point in our evolution;

We received increasing interest and orders for our Test Solutions and Diagnostic Equipment, including our emerging contract testing center, from major automotive retailers, major global automotive,

aerospace and research institutions ;

We continued our social responsibility initiatives with the successful launch of an Agri-farm organic food and community program in Mexico and a continued focus on opportunities to enhance our Environmental, Social and Governance practices on a global basis.

Trends Affecting Our Business

Our business is impacted by various factors within the economy that affect both our customers and our industry, including but not limited to inflation, interest rates, global supply chain disruptions, fuel costs, wage

rates, and other economic conditions.

Given the nature of these various factors, we cannot predict whether or for how long certain trends will continue, nor can we predict to what degree these trends will impact us in the future.

The cost to manufacture and distribute our products is impacted by the cost of raw materials, finished goods, labor, and transportation.

During fiscal 2023, we experienced continued inflationary pressure and higher costs

as a result of the increasing cost of raw materials, finished goods, labor, transportation, and other administrative costs.

The increase in the cost of raw materials and finished goods are due in part to a shortage in the availability of certain

products and the higher cost of shipping.

We can only pass our increased costs onto customers on a limited basis.

Future general price inflation and its impact on costs and availability of materials could adversely affect our financial results.

Interest Rates

Interest rates are rising in an effort to curb higher inflation.

We are experiencing higher interest costs for our borrowing and our customers’ receivable discount programs, which have interest costs that vary with

interest rate movements.

The majority of our interest costs results from our customers’ receivable discount programs.

The weighted average discount rate for these programs was 5.3% for fiscal 2023 compared with 1.9% for fiscal 2022.

interest rates and any future increases in interest rates will continue to adversely affect our financial results.

Impact of COVID-19

The COVID-19 pandemic continues to adversely impact the U.S.

and global economies – creating uncertainty regarding the potential effects on the supply chain disruptions, rate of inflation, increasing interest rates, and

customer demand.

We incurred certain costs related to the COVID-19 pandemic, which are included in cost of goods sold and operating expenses in the consolidated statements of operations of $1,957,000 and $3,368,000 during fiscal 2023 and 2022,

respectively.

Employee Retention Credit

The CARES Act provides an employee retention credit (“ERC”) that is a refundable tax credit against certain employer taxes.

In the fourth quarter of the fiscal year ended March 31, 2022, we amended certain payroll tax filings and applied for a

refund of $5,104,000.

As of March 31, 2023, we determined that all contingencies related to the ERC were resolved and recorded a $5,104,000 receivable which is included in prepaid expenses and other current assets in the accompanying consolidated

balance sheet.

The ERC was recognized as a reduction in employer payroll taxes and allocated to the financial statement captions from which the employee’s taxes were originally incurred.

As a result, we recorded a reduction in expenses of

$2,034,000 in cost of goods sold, $1,377,000 in general and administrative expense, $968,000 in selling and marketing expense, and $725,000 in research and development expense, which is reflected in the accompanying consolidated statement of

operations for the year ended March 31, 2023.

In April 2023, we received full payment of the ERC receivable.

Segment Reporting

Pursuant to the guidance provided under the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) for segment reporting, we have identified our chief operating decision maker

(“CODM”), reviewed the documents used by the CODM, and understand how such documents are used by the CODM to make financial and operating decisions.

We have determined through this review process that our business comprises three separate operating

All of the operating segments meet all the aggregation criteria, and are aggregated.

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) test solutions and diagnostic

equipment for the pre- and post-production of electric vehicles, (iii) software emulation of power systems applications for the electrification of all forms of transportation (including automobiles, trusts and the emerging electrification

of systems within the aerospace industry, such as electric vehicle charging stations), and

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

Prior to the fourth quarter of fiscal 2023, our operating segments met the aggregation criteria and were aggregated.

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.

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 separately reportable, and are included within the “all other” category.

See Note 19 of the notes to consolidated financial statements for more information.

Critical Accounting Policies

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Actual results may differ from our estimates.

There continues to be uncertainty and disruption in the global economy and financial markets in connection with the COVID-19 pandemic.

We are not currently aware of any specific event or circumstance that would require an update to our estimates

or judgments or a revision of the carrying value of our assets or liabilities as of March 31, 2022.

There continues to be uncertainty and disruption in the global economy and financial markets.

We are not currently aware of any specific event or circumstance that would require an update to our estimates or judgments or a revision of the

carrying value of our assets or liabilities as of March 31, 2023.

These estimates may change, as new events occur and additional information is obtained.

Actual results could differ materially from these estimates

under different assumptions or conditions.

Actual results could differ materially from these estimates under different assumptions or

Our remanufacturing operations include core exchange programs for the core portion of the finished goods.

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These elements of our business give rise to more complex accounting than many businesses our size or larger.

Recently Adopted Accounting Pronouncements

In December 2019, the FASB issued guidance that simplifies the accounting for income taxes, eliminates certain exceptions within ASC 740, Income Taxes, and clarifies certain aspects of the current guidance to promote consistent application.

guidance is effective for annual and interim periods in fiscal years beginning after December 15, 2020.

The adoption of this guidance on April 1, 2021 did not have any material impact on our consolidated financial statements.

Inventory is comprised of:

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March 31, 2023 and 2022, respectively.

This increase in the reserve was primarily due to excess inventory of certain finished goods on hand at March 31, 2023 compared with March 31, 2022.

We record vendor discounts as a reduction of inventories and are recognized as a reduction to cost of sales as the inventories are sold.

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Remanufactured Cores held at customers’ locations as a part of the finished goods sold to the customer are classified as long-term contract assets.

These assets are valued at the lower of cost or net realizable

value of Used Cores on hand (See Inventory above).

For these Remanufactured Cores, we expect the finished good containing the Remanufactured Core to be returned under our general right of return policy or a similar Used Core to be returned to us

by the customer, under our core exchange programs, in each case for credit.

Remanufactured Cores and Used Cores returned by consumers to our customers but not yet returned to us are classified as “Cores expected to be returned by customers”,

which are included in short-term contract assets until we physically receive them during our normal operating cycle, which is generally one year.

Upfront payments to customers represent the marketing allowances, such as sign-on bonuses, slotting fees, and promotional allowances provided to our customers.

These allowances are recognized as an asset and amortized over the appropriate period

of time as a reduction of revenue if we expect to generate future revenues associated with the upfront payment.

These assets are valued at the lower of cost or net realizable value of

Used Cores on hand (See Inventory above).

For these Remanufactured Cores, we expect the finished good containing the Remanufactured Core to be returned under our general right of return policy or a similar Used Core to be returned to us by the

customer, under our core exchange programs, in each case for credit.

Remanufactured Cores and Used Cores returned by consumers to our customers but not yet returned to us are classified as “Cores expected to be returned by customers”, which are

included in short-term contract assets until we physically receive them during our normal operating cycle, which is generally one year.

Upfront payments to customers represent marketing allowances, such as sign-on bonuses, slotting fees, and promotional allowances provided to our customers.

These allowances are recognized as an asset and amortized over the appropriate period of

time as a reduction of revenue if we expect to generate future revenues associated with the upfront payment.

If we do not expect to generate additional revenue, then the upfront payment is recognized in the

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Upfront payments expected to be amortized during our normal operating cycle, which is generally one year, are classified as short-term contract assets.

Core premiums paid to customers represent the difference between the Remanufactured Core acquisition price paid to customers generally in connection with new business, and the related Used Core cost, which is treated as an asset and recognized as a reduction of revenue through the later of the date at which related revenue is recognized or the date at which the sales incentive is offered.

Core premiums paid to customers represent the difference between the Remanufactured Core acquisition price paid to customers generally in connection with new business, and the related Used Core cost.

The core premiums are treated as an asset and

recognized as a reduction of revenue through the later of the date at which related revenue is recognized or the date at which the sales incentive is offered.

We consider, among other things, the length of our

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Core premiums are recorded as long-term contract assets.

Core premiums expected to be

amortized within our normal operating cycle, which is generally one year, are classified as short-term contract assets.

Core premiums expected to be amortized

within our normal operating cycle, which is generally one year, are classified as short-term contract assets.

Finished goods premiums paid to customers represent the difference between the finished good acquisition price paid to customers, generally in connection with new business, and the related finished good cost, which is treated as an asset and recognized as a reduction of revenue through the later of the date at which related revenue is recognized or the date at which the sales incentive is offered.

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Finished goods premiums are recorded as long-term contract assets.

Finished goods premiums

expected to be amortized within our normal operating cycle, which is generally one year, are classified as short-term contract assets.

Finished goods premiums expected

to be amortized within our normal operating cycle, which is generally one year, are classified as short-term contract assets.

Long-term core inventory deposits represent the cost of Remanufactured Cores we have purchased from customers, which are held by the customers and remain on the customers’ premises.

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The allowance for warranty returns is established based on a historical analysis of the level of this type of return as a percentage of total unit sales.

The allowance for stock adjustment returns is based on

specific customer inventory levels, inventory movements, and information on the estimated timing of stock adjustment returns provided by customers.

The allowance for stock adjustment returns is based on specific

customer inventory levels, inventory movements, and information on the estimated timing of stock adjustment returns provided by customers.

Stock adjustment returns do not occur at any specific time during the year.

The return rate for

stock adjustments is calculated based on expected returns within the normal operating cycle, which is generally one year.

The return rate for stock

adjustments is calculated based on expected returns within the normal operating cycle, which is generally one year.

The Unit Value of the warranty and stock adjustment returns are treated as reductions of revenue based on the estimations made at the time of the sale.

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Contract liability consists of:

(i) customer allowances earned, (ii) accrued core payments, (iii) customer core returns accruals, (iv) core bank liability, (v) finished goods liabilities, and (vi) customer

(i) customer allowances earned, (ii) accrued core payments, (iii) customer core returns accruals, (iv) core bank liability, (v) finished goods liabilities, and (vi) customer deposits.

Customer allowances earned includes all marketing allowances provided to customers.

Such allowances include sales incentives and concessions.

Voluntary marketing allowances related to a single exchange of product

are recorded as a reduction of revenues at the time the related revenues are recorded or when such incentives are offered.

Voluntary marketing allowances related to a single exchange of product are

recorded as a reduction of revenues at the time the related revenues are recorded or when such incentives are offered.

Other marketing allowances, which may only be applied against future purchases, are recorded as a reduction to revenues in

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Customer core returns accruals represent the full and nominally priced Remanufactured Cores shipped to our customers.

When we ship product, we recognize an obligation to accept a similar Used Core sent back under

the core exchange programs based upon the Remanufactured Core price agreed upon by us and our customer.

When we ship product, we recognize an obligation to accept a similar Used Core sent back under the

core exchange programs based upon the Remanufactured Core price agreed upon by us and our customer.

The contract liability related to Used Cores returned by consumers to our customers but not yet returned to us are classified as short-term

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The core bank liability represents the full Remanufactured Core sales price for cores returned under our core exchange programs.

The payment for these returned cores are made over a contractual repayment period

pursuant to our agreement with this customer.

The payment for these returned cores are made over a contractual repayment period pursuant

to our agreement with this customer.

Payments to be made within our normal operating cycle, which is generally one year, are considered short-term contract liabilities and the remainder are recorded as long-term contract liabilities.

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Customer deposits represent the receipt of prepayments from customers for the obligation to transfer goods or services in the future.

We classify these customer deposits as short-term contract liabilities as we

expect to satisfy these obligations within our normal operating cycle, which generally one year.

We classify these customer deposits as short-term contract liabilities as we expect

to satisfy these obligations within our normal operating cycle, which generally one year.

Customer Finished Goods Returns Accrual

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31, 2023 and 2022, respectively.

The increase in the customer finished goods returns accrual primarily resulted from the timing of returned goods authorizations (“RGAs”) issued at March 31, 2022 compared with March 31, 2021.

The change in the customer finished goods returns accrual primarily resulted from the timing of returned goods authorizations (“RGAs”) issued at March 31, 2023 compared with March 31, 2022.

We account for income taxes using the liability method, which measures deferred income taxes by applying enacted statutory rates in effect at the balance sheet date to the differences between the tax basis of assets and liabilities and their

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

The following summarizes certain key operating data for the periods indicated:

The following summarizes certain key operating consolidated data for the periods indicated:

Fiscal Years Ended March 31,

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measure of our ability to turn our inventory into revenues.

The decrease in finished goods turnover for fiscal 2022 reflects our continued investment in inventory to address disruptions related to the worldwide supply chain and logistics

challenges to meet higher anticipated future sales.

Our finished goods turnover for fiscal 2023 was impacted by our investment in inventory during the prior year to address disruptions related to the worldwide supply chain and

logistics challenges to meet higher anticipated future sales.

Fiscal 2023 Compared with Fiscal 2022

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Gross profit percentage

Our net sales for fiscal 2022 were $650,308,000, which represents an

increase of $109,526,000, or 20.3%, from fiscal 2021 of $540,782,000.

While our net sales increased across all product lines due to strong demand for our products, we continued to experience a number of challenges related to the global COVID-19

pandemic, including disruptions with worldwide supply chain and logistics services during both periods.

Net sales for fiscal 2022 and 2021 include $13,327,000 and $12,779,000, respectively, in core revenue due to a realignment of inventory at

certain customer distribution centers.

We expect this realignment will benefit our future sales as product mix changes.

The following summarizes sales mix:

Our consolidated net sales for the year ended March 31, 2023 were $683,074,000, which represents an increase of $32,766,000, or 5.0%, from the year ended March 31, 2022 of $650,308,000.

prior year’s net sales was positively impacted by $13,327,000 in core revenue due to a realignment of inventory at certain customer distribution centers.

This increase in net sales for the year ended March 31, 2023 primarily reflects growing sales

of our brake-related products and higher sales of our rotating electric products, partially offset by disruptions to global supply chain and logistics services and inventory reduction initiatives from one of our largest customers.

The following summarizes consolidated net sales by product mix:

Years Ended March 31,

Rotating electrical products

Wheel hub products

Brake-related products

Other products

Gross Profit.

Our consolidated gross profit was $113,962,000, or 16.7% of consolidated net sales, for the year ended March 31, 2023 compared with $117,865,000, or 18.1% of

consolidated net sales, for the year ended March 31, 2022.

Our gross margin for the year ended March 31, 2023 reflects (i) higher per unit costs resulting from absorption of overhead costs as we manage our inventory levels, (ii) higher costs due to

disruptions to the global supply chain, logistics services, related higher freight costs, higher wages, (iii) impact of core revenue in the prior period due to a realignment of inventory at certain customer distribution centers, and (iv) changes in

Our gross margin for the years ended March 31, 2023 and 2022 was impacted by (i) higher freight costs, net of certain price increases, of $3,290,000, and $9,135,000, respectively, (ii) additional expenses due to certain

costs for disruptions in the supply chain of $8,195,000 and $8,759,000, respectively, (iii) amortization of core and finished goods premiums paid to customers related to new business of $11,791,000 and

$11,960,000, respectively.

In addition, gross margin for the year ended March 31, 2023 was impacted by (i) non-cash quarterly revaluation of cores that are part of the finished goods on the customers’ shelves (which are included in contract

assets) to the lower of cost or net realizable value, which resulted in a write-down of $3,736,000 and (ii) a $2,034,000 reduction of payroll expense for the ERC.

For the year ended March 31, 2022, gross margin was impacted by 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 and gain due to realignment of inventory at certain customer distribution centers, which resulted in a net gain of $75,000.

Gross margin for the year ended March 31, 2022 was further impacted by transition expenses

in connection with the expansion of our brake-related operations in Mexico of $2,744,000.

Operating Expenses

The following summarizes consolidated operating expenses:

Fiscal Years Ended March 31,

General and administrative

Sales and marketing

Research and development

Foreign exchange impact of lease liabilities and forward contracts

Percent of net sales

General and administrative

Sales and marketing

Research and development

Foreign exchange impact of lease liabilities and forward contracts

General and Administrative.

Our general and administrative expenses for fiscal 2023 were $54,756,000, which represents a decrease of $2,743,000, or 4.8%, from fiscal 2022 of $57,499,000.

The decrease in

general and administrative expense during fiscal 2023 was primarily due to (i) $3,743,000 of decreased employee incentives as no bonuses were recorded for fiscal 2023, (ii) $2,602,000 of decreased share-based compensation in connection with equity

grants made to employees, and (iii) a $1,377,000 reduction of payroll expense for the ERC.

These decreases were partially offset by (i) $1,640,000 of increased expense resulting from foreign currency transactions, (ii) $1,562,000 of increased

severance expense due to headcount reduction, (iii) $920,000 of increased employee-related expense at our offshore locations, (iv) $403,000 of increased information technology costs in connection with cybersecurity and other productivity tools, and

(v) $346,000 of increased professional services.

Sales and Marketing .

Our sales and marketing expenses for fiscal 2023 were $21,729,000, which represents a decrease of $1,104,000, or 4.8%, from fiscal 2022 of $22,833,000.

This decrease in sales and

marketing expense during fiscal 2023 was primarily due to (i) $1,359,000 of decreased employee-related expenses (including a $968,000 reduction of payroll expense for the ERC) due to our cost-cutting measures and (ii) $535,000 of decreased

marketing and advertising expenses.

These decreases were partially offset by (i) $359,000 of increased trade shows as normal business expenses resumed, (ii) $370,000 of increased travel costs as some business travel resumed, and (iii) $171,000 of

increased commissions due to higher sales.

Research and Development .

Our research and development expenses for fiscal 2023 were $10,322,000, which represents a decrease of $180,000, or 1.7%, from fiscal 2022 of $10,502,000.

This decrease in

research and development expenses during fiscal 2023 was primarily due to (i) a $725,000 reduction of payroll expense related to the ERC and (ii) $265,000 of decreased outside services.

These decreases were partially offset by (i) $558,000 of

increased samples for our core library and other research and development supplies and (ii) $238,000 of increased employee-related expenses.

Foreign Exchange Impact of Lease Liabilities and Forward Contracts .

Our foreign exchange impact of lease liabilities and forward contracts for the years ended March 31, 2023 and 2022 were non-cash gains

of $9,291,000 and $1,673,000, respectively.

This change was primarily due to (i) the remeasurement of our foreign currency-denominated lease liabilities, which resulted in non-cash gains of $6,515,000 and $1,989,000 for the years ended March 31,

2023 and 2022, respectively, due to foreign currency exchange rate fluctuations and (ii) the forward foreign currency exchange contracts, which resulted in a non-cash gain of $2,776,000 compared with a non-cash loss of $316,000 for the years ended

March 31, 2023 and 2022, respectively, due to the changes in their fair values.

Operating Income

Consolidated Operating Income .

Our consolidated operating income for the year ended March 31, 2023 was $36,446,000, which represents an increase of $7,742,000, or 27.0%, from the year ended March 31, 2022

of $28,704,000.

Operating income increased primarily due to increased non-cash gains from the foreign exchange impact of lease liabilities and forward contracts and lower operating expenses, which were partially offset by lower gross profit as

discussed above.

Interest Expense

Interest Expense, net.

Our interest expense for the year ended March 31, 2023 was $39,555,000, which represents an increase of $24,000,000, or 154.3%, from interest expense for

the year ended March 31, 2022 of $15,555,000.

Approximately 86% of this increase was due to higher interest rates on our borrowing and accounts receivable discount programs, which have variable interest rates.

In addition, during the year ended

March 31, 2023, utilization of our accounts receivable discount programs and our average borrowing under our credit facility increased.

Provision for Income Taxes

We recorded an income tax expense of $1,098,000, or an effective tax rate of (35.3)%, and income tax expense of $5,788,000, or an effective tax rate of 44.0%, for

fiscal 2023 and 2022, respectively.

The effective tax rate for year ended March 31, 2023, was primarily impacted by (i) specific jurisdictions that we do not expect to recognize the benefit of losses, (ii) foreign income taxed at rates that are

different from the federal statutory rate, and (iii) non-deductible executive compensation under Internal Revenue Code Section 162(m).

Fiscal 2022 Compared with Fiscal 2021

Net Sales and Gross Profit

The following summarizes net sales and gross profit:

Fiscal Years Ended March 31,

Cost of goods sold

Gross profit percentage

Our consolidated net sales for fiscal 2022 were $650,308,000, which represents an increase of $109,526,000, or 20.3%, from fiscal 2021 of $540,782,000.

While our net sales increased across all

product lines due to strong demand for our products, we continued to experience a number of challenges related to the global COVID-19 pandemic, including disruptions with worldwide supply chain and logistics services during both periods.

for fiscal 2022 and 2021 include $13,327,000 and $12,779,000, respectively, in core revenue due to a realignment of inventory at certain customer distribution centers.

The following summarizes sales mix:

Years Ended March 31,

Rotating electrical products

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Gross Profit.

Our gross profit increased $8,404,000, or 7.7%,

to $117,865,000 for fiscal 2022 from $109,461,000 for fiscal 2021.

Our gross profit increased due to strong demand across all product lines.

Our gross margin was 18.1% of net sales for fiscal 2022 compared with 20.2% of net sales for fiscal 2021.

The decrease in our gross margin was primarily due to inflationary costs related to the global pandemic,

including disruptions with worldwide supply chain, logistics services, and related higher freight costs.

During fiscal 2022 and 2021, higher freight costs, net of certain price increases that went into effect during the latter part of the current

year, impacted gross margin by approximately $9,135,000, and $1,785,000, respectively.

During fiscal 2022, we also incurred additional expenses of $8,759,000 due to COVID-19 related costs for disruptions in the supply chain, increased salaries

associated with COVID-19 vulnerable employee pay, and personal protective equipment.

During fiscal 2021, we incurred additional expenses of $5,268,000 due to increased salaries associated with COVID-19 bonuses, vulnerable employee pay, and

personal protective equipment in connection with the COVID-19 pandemic.

Our gross margin for fiscal 2022 and 2021 was also impacted by (i) transition expenses in connection with the expansion of our brake-related operations in Mexico of $2,744,000 and $16,353,000, respectively, and

(ii) amortization of core and finished goods premiums paid to customers related to new business of $11,960,000 and $6,691,000, respectively.

Our gross profit increased $8,404,000, or 7.7%, to $117,865,000 for fiscal 2022 from $109,461,000 for fiscal 2021.

Our gross profit increased due to strong demand

across all product lines.

Our consolidated gross margin was 18.1% of net sales for fiscal 2022 compared with 20.2% of net sales for fiscal 2021.

The decrease in our gross margin was primarily due to inflationary costs related to the global

pandemic, including disruptions with worldwide supply chain, logistics services, and related higher freight costs.

During fiscal 2022 and 2021, higher freight costs, net of certain price increases that went into effect during the latter part of

the current year, impacted gross margin by approximately $9,135,000, and $1,785,000, respectively.

During fiscal 2022, we also incurred additional expenses of $8,759,000 due to COVID-19 related costs for disruptions in the supply chain, increased

salaries associated with COVID-19 vulnerable employee pay, and personal protective equipment.

During fiscal 2021, we incurred additional expenses of $5,268,000 due to increased salaries associated with COVID-19 bonuses, vulnerable employee pay,

and personal protective equipment in connection with the COVID-19 pandemic.

amortization of core and finished goods premiums paid to customers related to new business of $11,960,000 and $6,691,000, respectively.

Expansion of our brake-related operations in Mexico was completed

during the second quarter of fiscal 2022.

In addition, gross margin was impacted by (i) non-cash quarterly revaluation of cores that are part of the finished goods on the customers’ shelves (which are included in contract assets) to the lower of cost or

net realizable value and gain due to realignment of inventory at customer distribution centers, which resulted in a net gain of $75,000 and net write-down of $209,000 for fiscal 2022 and 2021, respectively, (ii) customer allowances and return

realizable value and gain due to realignment of inventory at customer distribution centers, which resulted in a net gain of $75,000 and net write-down of $209,000 for fiscal 2022 and 2021, respectively, (ii) customer allowances and return

accruals related to new business of $307,000 recorded during fiscal 2021, (iii) net tariff costs of $332,000 not passed through to customers for fiscal 2021, and (iv) a $3,561,000 benefit for revised tariff costs recorded during fiscal 2021.

Operating Expenses

The following summarizes operating expenses:

The following summarizes consolidated operating expenses:

Fiscal Years Ended March 31,

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General and Administrative.

Our general and administrative expenses for fiscal 2022

were $57,499,000, which represents an increase of $3,652,000, or 6.8%, from fiscal 2021 of $53,847,000, however, general and administrative expenses as a percentage of net sales decreased to 8.8% for fiscal 2022 from 10.0% for the prior year.

increase in general and administrative expense was primarily due to (i) $2,040,000 of increased share-based compensation due to equity grants made to employees in fiscal 2022, (ii) $353,000 of increased employee related expenses, primarily due to

the reinstatement of salary reductions in the prior year in response to the COVID-19 pandemic, (iii) $905,000 of decreased gain resulting from foreign currency transactions, (iv) $705,000 of increased costs at our offshore locations, (vi)

$305,000 of increased information technology costs in connection with cybersecurity and other productivity tools, and (vii) $292,000 of increased general insurance costs.

These increases in general and administrative expenses were partially

offset by $1,329,000 of decreased professional services.

Our general and administrative expenses for fiscal 2022 were $57,499,000, which represents an increase of $3,652,000, or 6.8%, from fiscal 2021 of $53,847,000, however, general

and administrative expenses as a percentage of net sales decreased to 8.8% for fiscal 2022 from 10.0% for the prior year.

The increase in general and administrative expense was primarily due to (i) $2,040,000 of increased share-based compensation

due to equity grants made to employees in fiscal 2022, (ii) $353,000 of increased employee related expenses, primarily due to the reinstatement of salary reductions in the prior year in response to the COVID-19 pandemic, (iii) $905,000 of decreased

gain resulting from foreign currency transactions, (iv) $705,000 of increased costs at our offshore locations, (vi) $305,000 of increased information technology costs in connection with cybersecurity and other productivity tools, and (vii) $292,000

of increased general insurance costs.

These increases in general and administrative expenses were partially offset by $1,329,000 of decreased professional services.

Sales and Marketing .

Our sales and marketing expenses for fiscal 2022 were

$22,833,000, which represents an increase of $4,809,000, or 26.7%, from fiscal 2021 of $18,024,000.

This increase in sales and marketing expense during fiscal 2022 was primarily due to (i) $1,500,000 of increased commissions due to higher sales,

(ii) $1,304,000 of increased employee related expenses, primarily due to the reinstatement of salary reductions in the prior year in response to the COVID-19 pandemic and increased headcount in the current year, (iii) $1,027,000 of increased

marketing in connection with new business and advertising expense, (iv) $501,000 of increased travel as normal business operations resume, and (v) $261,000 of increased trade shows expense as normal business operations resume.

Our sales and marketing expenses for fiscal 2022 were $22,833,000, which represents an increase of $4,809,000, or 26.7%, from fiscal 2021 of $18,024,000.

This increase in sales and

marketing expense during fiscal 2022 was primarily due to (i) $1,500,000 of increased commissions due to higher sales, (ii) $1,304,000 of increased employee related expenses, primarily due to the reinstatement of salary reductions in the prior year

in response to the COVID-19 pandemic and increased headcount in the current year, (iii) $1,027,000 of increased marketing in connection with new business and advertising expense, (iv) $501,000 of increased travel as normal business operations

resume, and (v) $261,000 of increased trade shows expense as normal business operations resume.

Research and Development .

Our research and development expenses for fiscal 2022 were

$10,502,000, which represents an increase of $1,939,000, or 22.6%, from fiscal 2021 of $8,563,000.

This increase in research and development expenses during fiscal 2022 was primarily due to (i) $1,274,000 of increased employee related expenses,

primarily due to the reinstatement of salary reductions in the prior year in response to the COVID-19 pandemic and increased headcount during the current year, (ii) $504,000 of increased outside services primarily due to development projects, and

(iii) $110,000 of increased samples for our core library and other research and development supplies.

Our research and development expenses for fiscal 2022 were $10,502,000, which represents an increase of $1,939,000, or 22.6%, from fiscal 2021 of $8,563,000.

This increase in

research and development expenses during fiscal 2022 was primarily due to (i) $1,274,000 of increased employee related expenses, primarily due to the reinstatement of salary reductions in the prior year in response to the COVID-19 pandemic and

increased headcount during the current year, (ii) $504,000 of increased outside services primarily due to development projects, and (iii) $110,000 of increased samples for our core library and other research and development supplies.

Foreign Exchange Impact of Lease Liabilities and Forward Contracts .

exchange impact of lease liabilities and forward contracts for fiscal 2022 was a non-cash gain of $1,673,000 compared with a non-cash gain for fiscal 2021 of $17,606,000.

This change in gain was primarily due to (i) the remeasurement of our

foreign currency-denominated lease liabilities which resulted in non-cash gains of $1,989,000 compared with $9,893,000 for fiscal 2022 and 2021, respectively, due to foreign currency exchange rate fluctuations and (ii) the forward foreign

currency exchange contracts which resulted in a non-cash loss of $316,000 compared with a non-cash gain of $7,713,000 for fiscal 2022 and 2021, respectively, due to the changes in their fair values.

Our foreign exchange impact of lease liabilities and forward contracts for fiscal 2022 was a non-cash gain of $1,673,000 compared with a

non-cash gain for fiscal 2021 of $17,606,000.

This change in gain was primarily due to (i) the remeasurement of our foreign currency-denominated lease liabilities which resulted in non-cash gains of $1,989,000 compared with $9,893,000 for fiscal

2022 and 2021, respectively, due to foreign currency exchange rate fluctuations and (ii) the forward foreign currency exchange contracts which resulted in a non-cash loss of $316,000 compared with a non-cash gain of $7,713,000 for fiscal 2022 and

2021, respectively, due to the changes in their fair values.

Operating Income

Consolidated Operating Income .

Our consolidated operating income for the year ended March 31, 2022 was $28,704,000, which represents a decrease of $17,929,000, or 38.4%, from the year ended March 31, 2021

of $46,633,000.

Operating income decreased primarily due to decreased non-cash gains from foreign exchange impact of lease liabilities and forward contracts and increased operating expenses, which were partially offset by increased gross profit as

discussed above.

Interest Expense

Interest Expense, net.

Our interest expense, net for fiscal 2022

was $15,555,000, which represents a decrease of $215,000, or 1.3%, from fiscal 2021 of $15,770,000.

The decrease in interest expense was primarily due to lower interest rates on our accounts receivable discount programs partially offset by

increased borrowing under our credit facility.

Our interest expense, net for fiscal 2022 was $15,555,000, which represents a decrease of $215,000, or 1.3%, from fiscal 2021 of $15,770,000.

in interest expense was primarily due to lower interest rates on our accounts receivable discount programs partially offset by increased borrowing under our credit facility.

Provision for Income Taxes

We recorded income tax expense

of $5,788,000, or an effective tax rate of 44.0%, for fiscal 2022 and $9,387,000, or an effective tax rate of 30.4%, for fiscal 2021.

The effective tax rate for fiscal 2022 was primarily impacted by (i) non-deductible executive compensation under

Internal Revenue Code Section 162(m), (ii) income taxes associated with uncertain tax positions , (iii) specific jurisdictions that we do not expect to

recognize the benefit of losses, and (iv) foreign income taxed at rates that are different from the federal statutory rate.

Fiscal 2021 Compared with Fiscal 2020

A discussion of the changes in our results of operations for the year ended March 31, 2021, as compared with the year ended March 31,

2020, has been omitted from this Form 10-K but may be found in Item 7.

“Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the annual report on Form 10-K for the year ended March 31, 2021, filed with the SEC on June 14, 2021, which is available free of charge on the SEC’s website at www.sec.gov by searching with our ticker symbol

“MPAA” or at our internet address, www.motorcarparts.com , by clicking “Investors” located at the top of the page.

We recorded income tax expense of $5,788,000, or an effective tax rate of 44.0%, for fiscal 2022 and $9,387,000, or an effective tax rate of

30.4%, for fiscal 2021.

The effective tax rate for fiscal 2022 was primarily impacted by (i) non-deductible executive compensation under Internal Revenue Code Section 162(m), (ii) income taxes associated with uncertain tax positions , (iii) specific jurisdictions that we do not expect to recognize the benefit of losses, and (iv) foreign income taxed at rates that are different from the federal statutory rate.

Liquidity and Capital Resources

We had working capital (current assets minus current liabilities) of $110,580,000 and $96,725,000, a ratio of current assets to current liabilities of 1.3:1.0, at March 31, 2022 and 2021, respectively.

The increase in working capital resulted

from our investment in inventory to address disruptions related to the worldwide supply chain and logistics challenges to meet higher anticipated sales.

We generated cash during fiscal 2022 from the use of receivable discount programs and credit facility.

In addition, we have access to our existing cash, as well as our available credit facilities to meet short-term liquidity needs.

our cash and cash equivalents, short-term investments, use of receivable discount programs, amounts available under our credit facility, and other sources are sufficient to satisfy our expected future working capital needs, repayment of the current

portion of our term loans, and lease and capital expenditure obligations over the next 12 months.

We had working capital (current assets minus current liabilities) of $154,886,000 and $110,580,000, a ratio of current assets to current liabilities of 1.4:1.0 at March 31, 2023 and 1.3:1.0 at March 31, 2022.

The increase in working capital

resulted primarily from (i) lower accounts payable balances, (ii) the pay down of our revolving loans from the net proceeds received from the issuance of $32,000,000 in convertible notes, (iii) higher accounts receivable, which resulted from higher

net sales for fiscal 2023, and (iv) a reduction of inventory that was built-up in the prior year to meet customer demand.

Our primary source of liquidity was from the use of our receivable discount programs, credit facility, and issuance of convertible notes during fiscal 2023.

In addition, we have access to our existing cash, as well as our available credit

facilities to meet short-term liquidity needs.

We believe our cash and cash equivalents, use of receivable discount programs, amounts available under our credit facility, and other sources are sufficient to satisfy our expected future working

capital needs, repayment of the current portion of our term loans, and lease and capital expenditure obligations over the next 12 months.

On March 31, 2023, we issued $32,000,000 aggregate principal amount of convertible notes in a private placement offering.

The convertible notes 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 aggregate proceeds from the offering were approximately $ 31,280,000 , net initial

purchasers’ fees and other related expenses.

The notes will mature on March 30, 2029, unless earlier converted, repurchased or redeemed.

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

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Effect of exchange rates on cash and cash equivalents

Net increase (decrease) in cash and cash equivalents

Net (decrease) increase in cash and cash equivalents

Additional selected cash flow data:

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Fiscal 2023 Compared with Fiscal 2022

Net cash used in operating activities was $21,754,000 and $44,862,000 for fiscal 2023 and 2022, respectively.

The significant change in our operating activities was due primarily to (i) a reduction of inventory that was built-up in the prior

year to meet customer demand, (ii) a reduction of accounts payable balances due to lower purchases as we continue to manage our inventory levels, and (iii) increased sales for fiscal 2023 compared with fiscal 2022, resulting in a higher accounts

receivable balance which will be collected in future periods.

We continue to manage our working capital to maximize our operating cash flow.

Net cash used in investing activities was $4,191,000 and $7,938,000 for fiscal 2023 and 2022, respectively.

The change in our investing activities primarily resulted from decreased capital expenditures due to the completion of our expansion of

our brake-related operations in Mexico during the second quarter of fiscal 2022.

Net cash provided by financing activities was $14,308,000 and $60,215,000 for fiscal 2023 and 2022, respectively.

The significant change in our financing activities was due mainly to net repayments under our credit facility during fiscal 2023

compared to net borrowings under our credit facility during fiscal 2022 to support the investment in our inventory partially offset by $32,000,000 in proceeds less debt issuance costs from the issuance of our convertible notes during fiscal 2023.

In addition, we repurchased 106,486 shares of our common stock for $1,914,000 during fiscal 2022.

Fiscal 2022 Compared with Fiscal 2021

Net cash used in operating activities was $44,862,000 for fiscal 2022 compared with net cash provided by operating activities of $56,089,000 for fiscal 2021.

The significant change in our operating activities was due primarily to (i) increased

sales for fiscal 2022 compared with fiscal 2021, resulting in a higher accounts receivable balance which will be collected in future periods and (ii) higher inventory purchases during the current year compared with the prior year as we increased

our inventory levels as a result of disruptions with worldwide supply chain and logistics services to meet higher anticipated sales, however, our days payable outstanding did not increase proportionately to our purchases during the current year as

compared with the prior year.

The significant change in our operating activities was due

primarily to (i) increased sales for fiscal 2022 compared with fiscal 2021, resulting in a higher accounts receivable balance which will be collected in future periods and (ii) higher inventory purchases during the current year compared with the

prior year as we increased our inventory levels as a result of disruptions with worldwide supply chain and logistics services to meet higher anticipated sales, however, our days payable outstanding did not increase proportionately to our purchases

during the current year as compared with the prior year.

Our operating results (net income plus the net add-back for non-cash transactions in earnings) were higher during fiscal 2022 as compared with fiscal 2021.

Net cash used in investing activities was $7,938,000 and $14,214,000 for fiscal 2022 and 2021, respectively.

The significant change in our investing activities was due primarily to decreased capital expenditures in connection with the completion

of our expansion of our brake-related operations in Mexico during the second quarter of fiscal 2022.

The significant change in our investing activities was due primarily to decreased capital expenditures in

connection with the completion of our expansion of our brake-related operations in Mexico during the second quarter of fiscal 2022.

Net cash provided by financing activities was $60,215,000 for fiscal 2022 compared with net cash used in financing activities $76,567,000 for fiscal 2021.

The significant change in our financing activities was due mainly to additional net

borrowings under our credit facility during fiscal 2022 to support the investment in our inventory compared with repayments under our credit facility during fiscal 2021.

Fiscal 2021 Compared with Fiscal 2020

A discussion of the changes in our operating activities, investing activities, and financing activities for the year ended March 31, 2021,

as compared with the year ended March 31, 2020, has been omitted from this Form 10-K but may be found in Item 7.

“MPAA” or at our internet address, www.motorcarparts.com , by clicking “Investors” located at the top of the page.

The significant change in our financing activities was due mainly

to additional net borrowings under our credit facility during fiscal 2022 to support the investment in our inventory compared with repayments under our credit facility during fiscal 2021.

Capital Resources

Credit Facility

We are party to a $268,620,000 senior secured financing, (as amended from time to time, the “Credit Facility”) with a syndicate of lenders, and PNC Bank, National Association, as administrative agent, consisting of (i) a $238,620,000 revolving

loan facility, subject to borrowing base restrictions, a $24,000,000 sublimit for borrowings by Canadian borrowers, and a $20,000,000 sublimit for letters of credit (the “Revolving Facility”) and (ii) a $30,000,000 term loan facility (the “Term

The loans under the Credit Facility mature on June 5, 2023.

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

In connection with the Credit Facility, the lenders have a security interest in substantially all of our assets.

In May 2021, we entered into a third amendment to the Credit Facility (the “Third Amendment”).

The Third Amendment, among other things, (i) extended the maturity date from June 5, 2023 to May 28, 2026, (ii) modified the fixed charge coverage

ratio financial covenant, and (iii) modified the definition of “Consolidated EBITDA”.

We capitalized $1,159,000 of new debt issuance costs in connection with the Third Amendment.

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.

The Credit Facility bears interest at rates equal to either SOFR (as defined below) plus a margin of 2.75%, 3.00% or 3.25% or a reference rate plus a margin of 1.75%, 2.00% or

2.25%, in each case depending on the senior leverage ratio as of the applicable measurement date.

There is also a facility fee of 0.375% to 0.50%, depending on the senior leverage ratio as of the applicable measurement date.

The interest rate on our Term Loans and

Revolving Facility was 2.99% and 3.13%, respectively, at March 31, 2022, and 2.62% at March 31, 2021.

The interest rate on

our Term Loans and Revolving Facility was 8.02% and 8.13%, respectively, at March 31, 2023, and 2.99% and 3.13%, respectively, at March 31, 2022.

The Credit Facility, among other things, requires us to maintain certain financial covenants -- including a maximum senior leverage ratio and a minimum fixed charge coverage ratio.

We were in compliance with all

financial covenants as of March 31, 2022.

Our Consolidated EBITDA for the purposes of bank covenant calculations was $62,540,000 for fiscal 2022.

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

Financial covenants

required per the Credit

Calculation as of

March 31, 2022

Maximum senior leverage ratio

Minimum fixed charge coverage ratio

We had cash of $23,016,000 at March 31, 2022, however, the Credit Facility only allows up to $6,000,000 of credit for cash when computing the senior leverage ratio.

Our senior leverage ratio would have been 2.55 had we paid down the Revolving

Facility with cash on hand.

In addition to other covenants, the Credit Facility places limits on our ability to incur liens, incur additional indebtedness, make loans and investments, engage in mergers and

acquisitions, engage in asset sales, redeem or repurchase capital stock, alter the business conducted by us and our subsidiaries, transact with affiliates, prepay, redeem or purchase subordinated debt, and amend or otherwise alter debt

In addition, the Credit Facility places

limits on our ability to incur liens, incur additional indebtedness, make loans and investments, engage in mergers and acquisitions, engage in asset sales, redeem, or repurchase capital stock, alter the business conducted by us and our

subsidiaries, transact with affiliates, prepay, redeem, or purchase subordinated debt, and amend or otherwise alter debt agreements.

On November 3, 2022, we entered into a fourth amendment to the Credit Facility, which among other things, (i) modified the fixed charge coverage ratio financial covenant for the fiscal quarters ending September 30, 2022

and December 31, 2022, (ii) modified the total leverage ratio financial covenant for the quarter ending September 30, 2022, (iii) modified the definition of “Consolidated EBITDA”, and (iv) replaced LIBOR as the benchmark rate with a replacement

benchmark based on the Secured Overnight Financing Rate (“SOFR”) effective November 3, 2022.

The modifications to the financial covenants were effective as of September 30, 2022.

As of December 31, 2022, we identified certain defaults with respect to the Credit Facility, which arose from non-compliance with certain financial covenants.

On February 3, 2023, we entered into the fifth amendment,

which among other things, (i) waived certain existing defaults and events of defaults arising from non-compliance with the fixed charge coverage ratio and senior leverage ratio financial covenants as of the end of the fiscal quarter ended December

31, 2022, (ii) modified the fixed charge coverage ratio and senior leverage ratio financial covenant levels for the quarters ending March 31, 2023 and June 30, 2023, (iii) modified the definitions of “Applicable Margin” and “Consolidated EBITDA”,

and (iv) added a new minimum undrawn availability financial covenant.

On March 31, 2023, we entered into a sixth amendment to the Credit Facility, which among other things, (i) permitted the issuance of the Convertible Notes (as defined below), (ii) amended the definition of Consolidated

EBITDA, and (iii) amended certain component definitions used in calculating the senior leverage ratio financial covenant to exclude the Convertible Notes (as defined below).

We were in compliance with all financial covenants as of March 31, 2023.

We had $145,200,000 and $155,000,000 outstanding under the Revolving Facility at March 31, 2023 and 2022, respectively.

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after certain adjustments, $87,050,000 was available under the Revolving Facility.

Convertible Notes

On March 31, 2023, we entered into a note purchase agreement (the “Note Purchase Agreement”) with Bison Capital Partners VI, L.P.

and Bison Capital Partners VI-A, L.P.

(collectively, the “Purchasers”) and Bison Capital

Partners VI, L.P., as the purchaser representative (the “Purchaser Representative”) for the issuance and sale of $32,000,000 in aggregate principal amount of convertible notes due in 2029 (the “Convertible Notes”) to be used for general corporate

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.

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.

The aggregate proceeds from the offering were approximately $31,280,000, net of initial purchasers’ fees and other related expenses.

The initial conversion rate is 66.6667 shares of our common stock per $1,000 principal

amount of notes (equivalent to an initial conversion price of approximately $15.00 per share of common stock).

At March 31, 2023, we had 28,650,590 shares of our common stock available to be issued if the Convertible Notes were converted.

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 Warrants do not become exercisable unless a Company

Redemption (as defined below) occurs and the volume weighted average price of our common stock for 20 consecutive days prior to the redemption is less than $15.00.

The fair value of the Warrants, using Level 3 inputs and the Monte Carlo simulation

model, was zero at March 31, 2023.

We estimate the fair value of the Warrants at each balance sheet date.

Any subsequent changes from the initial recognition in the fair value of the Warrants will be recorded in current period earnings in the

consolidated statements of operations.

The Convertible Notes may be converted, subject to certain conditions, at a conversion price of approximately $15.00 (the “Conversion Option”).

The Convertible Notes also include a provision for a return of interest

(“Return of Interest”), which requires the Purchasers to return 15.0% of the interest paid to us in certain circumstances.

The Return of Interest provision is accounted for as part of the Conversion Option and if the Conversion Option is exercised

in the future, the Return of Interest provision will remain outstanding until the Purchaser sells all of the underlying stock received upon conversion.

Upon conversion, any value associated with the Return of Interest provision will be reflected as

a derivative asset upon conversion, with changes in fair value being recorded in earnings in the consolidated statements of operations until settlement in connection with the sale of the underlying stock by the Purchaser.

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.

The conversion rate and

conversion price are subject to customary adjustments upon the occurrence of certain events.

The Convertible Notes have a stated maturity of March 30, 2029, subject to earlier conversion or redemption in accordance with their terms.

If there is a Fundamental Transaction, as defined in the Form of Convertible Promissory Note, we may redeem all or part of the Convertible Notes.

Except in the case of the occurrence of a Fundamental Transaction, 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 equal to the redemption price plus $4,000,000, but only if (i)

we are listed on a national exchange, (ii) there is no “Event of Default” occurring and continuing and (iii) Adjusted EBITDA for the prior four quarters is greater than $80,000,000.

The “Redemption Price” shall mean a cash amount equal to the

principal amount of the Convertible Notes to be redeemed, plus accrued and unpaid interest.

However, if the volume weighted average price of our common stock for 20 consecutive days prior to the notice of the Company Redemption is less than $15.00,

the Purchasers may exercise the warrants and we will pay the Redemption Price plus $2,000,000.

However, if the volume weighted average price of our common stock is less than $8 for 20 days between March 31, 2023 and September 27, 2023, we will pay

the redemption price plus $5,000,000.

The Conversion Option and the Company Redemption both met the criteria for bifurcation from the Convertible Notes as derivatives and using the Monte Carlo simulation model were fair valued as a derivative liability of

$10,400,000 and an asset of $1,970,000 at March 31, 2023, respectively.

The Company Redemption 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 consolidated balance sheet at March 31, 2023.

We estimate the fair value of the Compound Net Derivative Liability at each balance sheet date.

Any subsequent

changes from the initial recognition in the fair value of the Compound Net Derivative Liability will be recorded in current period earnings in the consolidated statements of operations.

The Convertible Notes also contain additional features, such as, default interest and options related to a Fundamental Transaction, requiring bifurcation which were not separately accounted for as the value of such

features were not material at March 31, 2023.

Any subsequent changes from the initial recognition in the fair value of those features will be recorded in current period earnings in the consolidated statements of operations.

The Convertible Notes include customary provisions relating to the occurrence of Events of Default, which include the following:

(i) certain payment defaults on the Convertible Notes; (ii) certain events of bankruptcy,

insolvency and reorganization involving us or any of our subsidiaries;

(iii) the entering of one or more final judgements or orders against us or any of our subsidiaries for an aggregate payment exceeding $25,000,000;

(iv) the acceleration of

(v) certain failures of us to comply with certain provisions of the Note Purchase Agreement or material breaches of the Note Purchase Agreement by us or any of our subsidiaries;

(vi) any material provision of the Note Purchase

Agreement, the Convertible Notes, the guarantee, the subordination agreement, the warrants or the registration rights agreement, for any reason, ceases to be valid and binding on us or any subsidiary, or any subsidiary shall so claim in writing to

challenge the validity of or our liability under the Note Purchase Agreement, the Convertible Notes, or the registration rights agreement;

or (vii) we fail to maintain the listing of our capital stock on a national securities exchange.

Default will be subject to a 30-day cure period except for those related to clause (ii) and (iv) of the preceding sentence.

If an Event of Default occurs and is continuing, then, we shall deliver written notice to the Purchasers within 5 business days of first learning of such Event of Default.

If an Event of Default involving bankruptcy,

insolvency or reorganization events with respect to us (and not solely with respect to our significant subsidiary) occurs, then the principal amount of, and all accrued and unpaid interest on, all of the Convertible Notes then outstanding will

immediately become due and payable without any further action.

Debt issuance costs of $1,006,000 are presented in the balance sheet as a direct deduction from the carrying amounts of the Convertible Notes at March 31, 2023.

Debt issuance costs are amortized using the effective

interest method through the maturity of the Convertible Note and recorded in interest expense in the consolidated statements of operations.

Debt issuance costs of $360,000 allocated to the Compound Net Derivative Liability were immediately expensed

to interest expense in the consolidated statements of operations for the year ended March 31, 2023.

Additionally, pursuant to the Note Purchase Agreement, subject to certain conditions, the Purchaser Representative shall have the right to nominate one director to serve (the “Investor Director”) on our Board of Directors

(the “Board”).

If an Investor Director is not currently serving on the Board, and subject to certain other conditions set forth in the Note Purchase Agreement, the Purchaser Representative shall have the right to designate one person to have

observation rights with respect to all meetings of the Board.

In connection with our entry into the Note Purchase Agreement, we have appointed Douglas Trussler to serve on our Board.

Receivable Discount Programs

29 unchanged sentences

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.

During fiscal 2022 and 2021, we repurchased 106,486 and 54,960 shares of our common stock,

respectively, for $1,914,000 and $1,139,000, respectively.

During fiscal 2023, we did not repurchase any shares of our common stock.

During fiscal 2022 and

2021, we repurchased 106,486 and 54,960 shares of our common stock, respectively, for $1,914,000 and $1,139,000, respectively.

As of March 31, 2023, $18,745,000 was utilized and $18,255,000 remains available to repurchase shares under the

17 unchanged sentences

Term loan (4)

Convertible notes (5)

Accrued core payment (6)

8 unchanged sentences

Term Loan obligations represent the amounts due for principal payments as well as interest payments to be made.

Interest payments were calculated based upon the interest rate for our Term Loan using the LIBOR option at March 31, 2022,

Interest payments were calculated based upon the interest rate for our Term Loan using the SOFR option at March 31, 2023,

which was 8.02%.

Accrued core payment represents the amounts due for principal of $2,607,000 and interest payments of $106,000 to be made in connection with the purchases of Remanufactured Cores from our customers, which are held by these customers and

remain on their premises.

Obligations under our Convertible Notes mature on March 30, 2029.

There are no future payments required under the Convertible Notes prior to their maturity, therefore, the carrying value of the notes plus interest payable in kind,

assuming no early redemption or conversion has occurred, is included in the above table based on their maturity date of March 30, 2029.

Accrued core payment represents the amounts due for principal of $12,227,000 and interest payments of $1,062,000 to be made in connection with the purchases of Remanufactured Cores from our customers, which are held by these customers

and remain on their premises.

The core bank liability represents the amounts due for principal of $15,268,000 and interest payments of $880,000 to be made in connection with the return of Used Cores from our customers.

1 unchanged sentence

We are unable to reliably estimate the timing of future payments related to uncertain tax position liabilities at March 31, 2023;

therefore, future tax payment accruals related to uncertain tax positions in the amount of $1,975,000 have

been excluded from the table above.

therefore, future tax payment accruals related to uncertain tax positions in the amount of $1,964,000

have been excluded from the table above.

Other long-term obligations represent commitments we have with certain customers to provide marketing allowances in consideration for multi-year customer agreements to provide products over a defined period.

2 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis