MOTORCAR PARTS OF AMERICA INC 10-K

Item 9A. Controls and Procedures Evaluation of Disclosure Controls and Procedures Management, with the participation of our Chief Executive Officer (“CEO”), Chief Financial Officer (“CFO”) and Chief Accounting Officer (“CAO”), has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a- 15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the “Exchange Act,”) as of the end of the period covered by this Annual Report on Form 10-K. Our disclosure controls and procedures are designed to provide reasonable assurance that information we are required to disclose in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our CEO, CFO and CAO, as appropriate to allow timely decisions regarding required disclosures, and is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Based on this evaluation, our CEO, CFO and CAO have concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of March 31, 2023. Management’s Annual Report on Internal Control over Financial Reporting Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d- 15(f) under the Exchange Act. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external purposes in accordance with generally accepted accounting principles. Management assessed the effectiveness of our internal control over financial reporting as of March 31, 2022 using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control—Integrated Framework (2013). Based on its assessment, our management, including our CEO and CFO, has concluded that our internal control over financial reporting was effective as of March 31, 2023. The effectiveness of our internal control over financial reporting as of March 31, 2023 has been audited by the Company’s independent registered public accounting firm, Ernst & Young LLP. Their assessment is included in the accompanying Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting. Change in Internal Control Over Financial Reporting There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) identified in connection with the evaluation of our internal control performed during the period covered by this report, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 47 Table of Contents Inherent Limitations on Effectiveness of Controls Management recognizes that a control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud or error, if any, have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. Item 9B. Other Information None. Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections None. 48 Table of Contents PART III Item 10. Directors, Executive Officers and Corporate Governance The information required by this item is incorporated by reference to our Definitive Proxy Statement in connection with our next Annual Meeting of Stockholders (the “Proxy Statement”). Item 11. Executive Compensation The information required by this item is incorporated by reference to the Proxy Statement. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information required by this item is incorporated by reference to the Proxy Statement. Item 13. Certain Relationships and Related Transactions, and Director Independence The information required by this item is incorporated by reference to the Proxy Statement. Item 14. Principal Accountant Fees and Services The information required by this item is incorporated by reference to the Proxy Statement. 49 Table of Contents PART IV Item 15. Exhibits, Financial Statement Schedules a. Documents filed as part of this report: (1) Index to Consolidated Financial Statements: Reports of Independent Registered Public Accounting Firm (PCAOB ID No. 42 ) 58 Consolidated Balance Sheets F-1 Consolidated Statements of Operations F-2 Consolidated Statements of Comprehensive Income F-3 Consolidated Statements of Shareholders’ Equity F-4 Consolidated Statements of Cash Flows F-5 Notes to Consolidated Financial Statements F-6 (2) Schedules. Schedule II — Valuation and Qualifying Accounts S-1 (3) Exhibits: Number Description of Exhibit Method of Filing 3.1 Certificate of Incorporation of the Company Incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form SB-2 declared effective on March 22, 1994 (the “1994 Registration Statement”). 3.2 Amendment to Certificate of Incorporation of the Company Incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form S-1 (No. 33-97498) declared effective on November 14, 1995 (the “1995 Registration Statement”). 3.3 Amendment to Certificate of Incorporation of the Company Incorporated by reference to Exhibit 3.3 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 1997. 3.4 Amendment to Certificate of Incorporation of the Company Incorporated by reference to Exhibit 3.4 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 1998 (the “1998 Form 10-K”). 3.5 Amendment to Certificate of Incorporation of the Company Incorporated by reference to Exhibit C to the Company’s proxy statement on Schedule 14A filed with the SEC on November 25, 2003. 3.6 Amended and Restated By-Laws of the Company Incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K filed on August 24, 2010. 3.7 Certificate of Amendment of the Certificate of Incorporation of the Company Incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K filed on April 17, 2014. 3.8 Amendment to the Amended and Restated By-Laws of the Company Incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K filed on June 14, 2016. 50 Table of Contents Number Description of Exhibit Method of Filing 3.9 Amendment to the Amended and Restated By-Laws of the Company Incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K filed on February 22, 2017. 3.10 Third Amendment to the Amended and Restated By-Laws of the Company Incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K filed on February 1, 2022. 4.1 Description of the Registrant’s Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934 Incorporated by reference to Exhibit 4.1 to Quarterly Report on Form 10-Q filed on August 9, 2022. 4.2 2004 Non-Employee Director Stock Option Plan Incorporated by reference to Appendix A to the Proxy Statement on Schedule 14A for the 2004 Annual Shareholders Meeting. 4.3 2010 Incentive Award Plan Incorporated by reference to Appendix A to the Proxy Statement on Schedule 14A filed on December 15, 2010. 4.4 Amended and Restated 2010 Incentive Award Plan Incorporated by reference to Appendix A to the Proxy Statement on Schedule 14A filed on March 5, 2013. 4.5 Second Amended and Restated 2010 Incentive Award Plan Incorporated by reference to Appendix A to the Proxy Statement on Schedule 14A filed on March 3, 2014. 4.6 2014 Non-Employee Director Incentive Award Plan Incorporated by reference to Appendix B to the Proxy Statement on Schedule 14A filed on March 3, 2014. 4.7 Third Amended and Restated 2010 Incentive Award Plan Incorporated by reference to Appendix A to the Proxy Statement on Schedule 14A filed on November 20, 2017. 4.8 Fourth Amended and Restated 2010 Incentive Award Plan Incorporated by reference to Appendix A to the Proxy Statement on Schedule 14A filed on July 24, 2020. 4.9 2022 Incentive Award Plan Incorporated by reference to Appendix A to the Proxy Statement on Schedule 14A filed on July 29, 2022. 4.10 Form of Convertible Promissory Note Incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K filed on March 31, 2023. 4.11 Form of Common Stock Warrant Incorporated by reference to Exhibit 4.2 to the Current Report on Form 8-K filed on March 31, 2023. 4.12 First Amended and Restated Convertible Promissory note Filed herewith. 4.13 First Amended and Restated Common Stock Warrant Filed herewith. 10.1 Form of Indemnification Agreement for officers and directors Incorporated by reference to Exhibit 10.25 to the 1997 Registration Statement. 10.2 Amended and Restated Employment Agreement, dated as of December 31, 2008, by and between the Company and Selwyn Joffe Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed January 7, 2009. 51 Table of Contents Number Description of Exhibit Method of Filing 10.3 Employment Agreement, dated as of May 18, 2012, between Motorcar Parts of America, Inc., and Selwyn Joffe Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed on May 24, 2012. 10.4 Form of Stock Option Notice for use in connection with stock options granted to Selwyn Joffe pursuant to the Motorcar Parts of America, Inc. 2010 Incentive Award Plan Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed on August 12, 2013. 10.5 Form of Stock Option Agreement for use in connection with stock options granted to Selwyn Joffe pursuant to the Motorcar Parts of America, Inc. 2010 Incentive Award Plan Incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K filed on August 12, 2013. 10.6* Revolving Credit, Term Loan and Security Agreement, dated as of June 3, 2015, among Motorcar Parts of America, Inc., each lender from time to time party thereto, and PNC Bank, National Association, as administrative agent Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on June 8, 2015. 10.7 First Amendment to Revolving Credit, Term Loan and Security Agreement, dated as of November 5, 2015, among Motorcar Parts of America, Inc., each lender from time to time party thereto, and PNC Bank, National Association, as administrative agent Incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q filed on November 9, 2015 . 10.8 Consent and Second Amendment to Revolving Credit, Term Loan and Security Agreement, dated as of May 19, 2016, among Motorcar Parts of America, Inc., each lender from time to time party thereto, and PNC Bank, National Association, as administrative agent Incorporated by reference to Exhibit 10.1 to Quarterly Report on Form 10-Q filed on August 9, 2016. 10.9 Third Amendment to Revolving Credit, Term Loan and Security Agreement, dated as of March 24, 2017, among Motorcar Parts of America, Inc., each lender from time to time party thereto, and PNC Bank, National Association, as administrative agent Incorporated by reference to Exhibit 10.38 to Annual Report on Form 10-K filed on June 14, 2017. 10.10 Fourth Amendment to Revolving Credit, Term Loan and Security Agreement, dated as of April 24, 2017, among Motorcar Parts of America, Inc., each lender from time to time party thereto and PNC Bank, National Association, as administrative agent Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed on April 27, 2017. 52 Table of Contents Number Description of Exhibit Method of Filing 10.11 Fifth Amendment to Revolving Credit, Term Loan and Security Agreement, dated as of July 18, 2017, among Motorcar Parts of America, Inc., each lender from time to time party thereto and PNC Bank, National Association, as administrative agent Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed on July 24, 2017. 10.12* Amended and Restated Credit Facility, dated as of June 5, 2018, among Motorcar Parts of America, Inc., each lender from time to time party thereto and PNC Bank, National Association, as administrative agent Incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q filed on August 9, 2018 . 10.13 First Amendment to Amended and Restated Loan Agreement, dated as of November 14, 2018, among Motorcar Parts of America, Inc., D & V Electronics Ltd., each lender from time to time party thereto, and PNC Bank, National Association, as administrative agent Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on November 20, 2018 . 10.14 Amendment No. 2 to Employment Agreement, dated as of February 5, 2019, between Motorcar Parts of America, Inc., and Selwyn Joffe Incorporated by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q filed on February 11, 2019. 10.15 Second Amendment to Amended and Restated Loan Agreement, dated as of June 4, 2019, among Motorcar Parts of America, Inc., D&V Electronics Ltd., Dixie Electric Ltd., Dixie Electric Inc., each lender from time to time party thereto, and PNC Bank, National Association, as administrative agent Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on June 7, 2019. 10.16 Amendment No. 3 to Employment Agreement, dated as of March 30, 2020, between Motorcar Parts of America, Inc., and Selwyn Joffe Incorporated by reference to Exhibit 10.24 to the Annual Report on Form 10-K filed on June 15, 2020. 10.17 Amendment No. 4 to Employment Agreement, dated as of May 21, 2020, between Motorcar Parts of America, Inc., and Selwyn Joffe Incorporated by reference to exhibit 10.1 to the Quarterly Report filed on August 10, 2020. 10.18 Third Amendment to Amended and Restated Loan Agreement, dated as of May 28, 2021, among Motorcar Parts of America, Inc., D&V Electronics Ltd., Dixie Electric Ltd., Dixie Electric Inc., each lender from time to time party thereto, and PNC Bank, National Association, as administrative agent Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on June 2, 2021. 53 Table of Contents Number Description of Exhibit Method of Filing 10.19 Amendment No. 5 to Employment Agreement, dated as of June 18, 2021, between Motorcar Parts of America, Inc., and Selwyn Joffe Incorporated by reference to Exhibit 10.1 to Quarterly Report on Form 10-Q filed on August 9, 2021. 10.20 Fourth Amendment to Amended and Restated Loan Agreement, dated as of November 3, 2022, among Motorcar Parts of America, Inc., D&V Electronics Ltd., Dixie Electric Ltd., Dixie Electric Inc., each lender from time to time party thereto, and PNC Bank, National Association, as administrative agent Incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q filed on November 9, 2022. 10.21 Fifth Amendment to Amended and Restated Loan Agreement, dated as of February 3, 2023, among Motorcar Parts of America, Inc., D&V Electronics Ltd., Dixie Electric Ltd., Dixie Electric Inc., each lender from time to time party thereto, and PNC Bank, National Association, as administrative agent Incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q filed on February 9, 2023. 10.22 Note Purchase Agreement Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on March 31, 2023. 10.23 Registration Rights Agreement Incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed on March 31, 2023. 10.24 Sixth Amendment to Amended and Restated Loan Agreement, dated as of May 28, 2021, among Motorcar Parts of America, Inc., D & V Electronics Ltd., Dixie Electric Ltd., and Dixie Electric Inc., each lender from time to time party thereto, and PNC Bank, National Association, as administrative agent Incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K filed on March 31, 2023. 10.25 Amendment No. 6 to Employment Agreement, dated March 29, 2023, between Motorcar Parts of America, Inc. and Selwyn Joffe. Incorporated by reference to Exhibit 10.4 to the Current Report on Form 8-K filed on March 31, 2023. 10.26 First Amendment to Note Purchase Agreement Filed herewith. 21.1 List of Subsidiaries Filed herewith. 23.1 Consent of Independent Registered Public Accounting Firm Ernst & Young LLP Filed herewith. 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002 Filed herewith. 54 Table of Contents 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002 Filed herewith. 31.3 Certification of Chief Accounting Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002 Filed herewith. 32.1 Certifications of Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer pursuant to Section 906 of the Sarbanes Oxley Act of 2002 Filed herewith. 101.INS Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the XBRL document) Filed herewith. 101.SCM Inline XBRL Taxonomy Extension Schema Document Filed herewith. 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document Filed herewith. 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document Filed herewith. 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document Filed herewith. 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document Filed herewith. 104 Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) Filed herewith. * Portions of this exhibit have been granted confidential treatment by the SEC. The agreements and other documents filed as exhibits to this report are not intended to provide factual information or other disclosure other than with respect to the terms of the agreements or other documents themselves, and you should not rely on them for that purpose. In particular, any representations and warranties made by us in those agreements or other documents were made solely within the specific context of the relevant agreement or document and may not describe the actual state of affairs as of the date they were made or at any other time. Item 16. Form 10-K Summary None. 55 Table of Contents SIGNATURES Pursuant to the requirements of Section 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MOTORCAR PARTS OF AMERICA, INC. Dated: June 13, 2023 By: /s/ David Lee David Lee Chief Financial Officer Dated: June 13, 2023 By: /s/ Kamlesh Shah Kamlesh Shah Chief Accounting Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Report on Form 10-K has been signed by the following persons on behalf of the Registrant in the capacities and on the dates indicated: /s/ Selwyn Joffe Chief Executive Officer and Director June 13, 2023 Selwyn Joffe (Principal Executive Officer) /s/ David Lee Chief Financial Officer June 13, 2023 David Lee (Principal Financial Officer) /s/ Kamlesh Shah Chief Accounting Officer June 13, 2023 Kamlesh Shah (Principal Accounting Officer) /s/ Rudolph Borneo Director June 13, 2023 Rudolph Borneo /s/ David Bryan Director June 13, 2023 David Bryan /s/ Joseph Ferguson Director June 13, 2023 Joseph Ferguson /s/ Philip Gay Director June 13, 2023 Philip Gay /s/ Jeffrey Mirvis Director June 13, 2023 Jeffrey Mirvis /s/ Jamy Rankin Director June 13, 2023 Jamy Rankin /s/ Douglas Trussler Director June 13, 2023 Douglas Trussler /s/ Patricia Warfield Director June 13, 2023 Patricia Warfield /s/ Barbara Whittaker Director June 13, 2023 Barbara Whittaker 56 Table of Contents MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES CONTENTS Page Reports of Independent Registered Public Accounting Firm 58 Consolidated Balance Sheets F-1 Consolidated Statements of Operations F-2 Consolidated Statements of Comprehensive Income F-3 Consolidated Statements of Shareholders’ Equity F-4 Consolidated Statements of Cash Flows F-5 Notes to Consolidated Financial Statements F-6 Schedule II — Valuation and Qualifying Accounts S-1 57 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and the Board of Directors of Motorcar Parts of America, Inc. Opinion on Internal Control Over Financial Reporting We have audited Motorcar Parts of America, Inc. and subsidiaries’ internal control over financial reporting as of March 31, 2023, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Motorcar Parts of America, Inc. and subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of March 31, 2023, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of March 31, 2023 and 2022, the related consolidated statements of operations, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended March 31, 2023, and the related notes and financial statement schedule and our report dated June 13, 2023 expressed an unqualified opinion thereon. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ Ernst & Young LLP Los Angeles, California June 13, 2023 58 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and the Board of Directors of Motorcar Parts of America, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Motorcar Parts of America, Inc. and subsidiaries (the Company) as of March 31, 2023 and 2022, the related consolidated statements of operations, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended March 31, 2023, and the related notes and financial statement schedule listed in the Index at Item 15 (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at March 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended March 31, 2023, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of March 31, 2023, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated June 13, 2023 expressed an unqualified opinion thereon. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Contractual Agreements with Core Exchange Programs Description of the Matter As more fully described in Note 2 to the consolidated financial statements, the Company enters into contractual arrangements with customers (core exchange programs) which represent the majority of the Company’s sales for products that contain remanufactured cores. At March 31, 2023, contract assets and contract liabilities related to core exchange programs recorded on the consolidated balance sheet were $343,824,000 and $233,946,000, respectively. Auditing contract assets and contract liabilities related to the core exchange programs involved complex auditor judgment due to the unique terms of each customer arrangement which impact the completeness, existence, valuation and classification of contract assets and liabilities. 59 Table of Contents How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over management’s review of contracts with customers, management’s assessment of the accounting for core exchange programs, including unique contractual terms, and management’s review of the related contract assets and liabilities including controls over the completeness and accuracy of data. Our audit procedures to test the contract assets and contract liabilities related to core exchange programs included, among others, (i) reviewing agreements and amendments for significant customers, (ii) testing the completeness of management’s identification of contractual terms, (iii) evaluating the consistency of the accounting treatment with the Company’s policies; and (v) testing the completeness and accuracy of the underlying data used in management’s analyses. Marketing Allowances Description of the Matter As more fully described in Note 2 and Note 14 to the consolidated financial statements, revenue is recognized net of applicable marketing allowances. These marketing allowances vary by contract and can include (i) the issuance of a specified amount of credits against receivables, (ii) support for research or marketing efforts, (iii) discounts granted in connection with shipments of product, and (iv) other marketing, research, store expansion or product development support. At March 31, 2023, marketing allowances recorded on the Company’s consolidated balance sheet was $19,997,000, which is presented within contract liabilities. Auditing the completeness of marketing allowances was complex because marketing allowances vary by contract and could be impacted by unrecorded marketing allowances provided to customers. How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the marketing allowances processes. For example, we tested controls over management’s review of contracts with customers containing marketing allowances, management’s review of the completeness and accuracy of data used in the marketing accrual analysis at period end and management’s review of credits issued to customers subsequent to the balance sheet date. Our audit procedures to test marketing allowances included, among others, reviewing significant contracts with customers, obtaining confirmations of contractual terms and conditions from a sample of the Company’s customers, and testing credits issued or payments made to customers throughout the year and subsequent to year-end. We tested the completeness and accuracy of data used in the calculation of the marketing allowance by agreeing contractual terms to the underlying agreements. In addition, we evaluated the relationship between revenue and marketing allowances and assessed subsequent events to determine whether there was any new information that would require adjustments to the amounts recorded. /s/ Ernst & Young LLP We have served as the Company’s auditor since 2007. Los Angeles, California June 13, 2023 60 Table of Contents MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES Consolidated Balance Sheets March 31, 2023 March 31, 2022 ASSETS Current assets: Cash and cash equivalents $ 11,596,000 $ 23,016,000 Short-term investments 2,011,000 2,202,000 Accounts receivable — net 119,868,000 85,075,000 Inventory — net 339,675,000 370,503,000 Inventory unreturned 16,579,000 15,001,000 Contract assets 25,443,000 27,500,000 Income tax receivable 2,156,000 301,000 Prepaid expenses and other current assets 20,150,000 13,387,000 Total current assets 537,478,000 536,985,000 Plant and equipment — net 46,052,000 51,062,000 Operating lease assets 87,619,000 81,997,000 Deferred income taxes 32,625,000 26,982,000 Long-term contract assets 318,381,000 310,255,000 Goodwill 3,205,000 3,205,000 Intangible assets — net 2,143,000 3,799,000 Other assets 1,062,000 1,413,000 TOTAL ASSETS $ 1,028,565,000 $ 1,015,698,000 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Accounts payable $ 119,437,000 $ 147,469,000 Accrued liabilities 22,329,000 20,966,000 Customer finished goods returns accrual 37,984,000 38,086,000 Contract liabilities 40,340,000 42,496,000 Revolving loan 145,200,000 155,000,000 Other current liabilities 4,871,000 11,930,000 Operating lease liabilities 8,767,000 6,788,000 Current portion of term loan 3,664,000 3,670,000 Total current liabilities 382,592,000 426,405,000 Term loan, less current portion 9,279,000 13,024,000 Convertible notes, related party 30,994,000 - Contract liabilities, less current portion 193,606,000 172,764,000 Deferred income taxes 718,000 126,000 Operating lease liabilities, less current portion 79,318,000 80,803,000 Other liabilities 11,583,000 7,313,000 Total liabilities 708,090,000 700,435,000 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; 19,494,615 and 19,104,751 shares issued and outstanding at March 31, 2023 and 2022, respectively 195,000 191,000 Additional paid-in capital 231,836,000 227,184,000 Retained earnings 88,747,000 92,954,000 Accumulated other comprehensive loss ( 303,000 ) ( 5,066,000 ) Total shareholders’ equity 320,475,000 315,263,000 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 1,028,565,000 $ 1,015,698,000 The accompanying notes to consolidated financial statements are an integral part hereof. F-1 Table of Contents MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES Consolidated Statements of Operations Years Ended March 31, 2023 2022 2021 Net sales $ 683,074,000 $ 650,308,000 $ 540,782,000 Cost of goods sold 569,112,000 532,443,000 431,321,000 Gross profit 113,962,000 117,865,000 109,461,000 Operating expenses: General and administrative 54,756,000 57,499,000 53,847,000 Sales and marketing 21,729,000 22,833,000 18,024,000 Research and development 10,322,000 10,502,000 8,563,000 Foreign exchange impact of lease liabilities and forward contracts ( 9,291,000 ) ( 1,673,000 ) ( 17,606,000 ) Total operating expenses 77,516,000 89,161,000 62,828,000 Operating income 36,446,000 28,704,000 46,633,000 Interest expense, net 39,555,000 15,555,000 15,770,000 (Loss) income before income tax expense ( 3,109,000 ) 13,149,000 30,863,000 Income tax expense 1,098,000 5,788,000 9,387,000 Net (loss) income $ ( 4,207,000 ) $ 7,361,000 $ 21,476,000 Basic net (loss) income per share $ ( 0.22 ) $ 0.38 $ 1.13 Diluted net (loss) income per share $ ( 0.22 ) $ 0.38 $ 1.11 Weighted average number of shares outstanding: Basic 19,340,246 19,119,727 19,023,145 Diluted 19,340,246 19,559,646 19,387,555 The accompanying notes to consolidated financial statements are an integral part hereof. F-2 Table of Contents MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES Consolidated Statements of Comprehensive Income Years Ended March 31, 2023 2022 2021 Net (loss) income $ ( 4,207,000 ) $ 7,361,000 $ 21,476,000 Other comprehensive income (loss), net of tax: Foreign currency translation income (loss) 4,763,000 2,630,000 ( 328,000 ) Total other comprehensive income (loss), net of tax 4,763,000 2,630,000 ( 328,000 ) Comprehensive income $ 556,000 $ 9,991,000 $ 21,148,000 The accompanying notes to consolidated financial statements are an integral part hereof. F-3 Table of Contents MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES Consolidated Statements of Shareholders’ Equity Common Stock Shares Amount Additional Paid-in Capital Common Stock Retained Earnings Accumulated Other Comprehensive Loss (Income) Total Balance at March 31, 2020 18,969,380 $ 190,000 $ 218,581,000 $ 64,117,000 $ ( 7,368,000 ) $ 275,520,000 Compensation recognized under employee stock plans - - 5,247,000 - - 5,247,000 Exercise of stock options 58,848 - 719,000 - - 719,000 Issuance of common stock upon vesting of RSUs, net of shares withheld for employee taxes 72,118 1,000 ( 351,000 ) - - ( 350,000 ) Repurchase and cancellation of treasury stock, including fees ( 54,960 ) ( 1,000 ) ( 1,138,000 ) - - ( 1,139,000 ) Foreign currency translation - - - - ( 328,000 ) ( 328,000 ) Net income - - - 21,476,000 - 21,476,000 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 - - 7,287,000 - - 7,287,000 Exercise of stock options, net of shares withheld for employee taxes and net share settlement of exercise price 33,996 - 499,000 - - 499,000 Issuance of common stock upon vesting of RSUs, net of shares withheld for employee taxes 131,855 2,000 ( 1,747,000 ) - - ( 1,745,000 ) Repurchase and cancellation of treasury stock, including fees ( 106,486 ) ( 1,000 ) ( 1,913,000 ) - - ( 1,914,000 ) Foreign currency translation - - - - 2,630,000 2,630,000 Net income - - - 7,361,000 - 7,361,000 Balance at March 31, 2022 19,104,751 $ 191,000 $ 227,184,000 $ 92,954,000 $ ( 5,066,000 ) $ 315,263,000 Compensation recognized under employee stock plans - - 4,685,000 - - 4,685,000 Exercise of stock options, net of shares withheld for employee taxes and net share settlement of exercise price 236,199 2,000 938,000 - - 940,000 Issuance of common stock upon vesting of RSUs, net of shares withheld for employee taxes 153,665 2,000 ( 971,000 ) - - ( 969,000 ) Foreign currency translation - - - - 4,763,000 4,763,000 Net loss - - - ( 4,207,000 ) - ( 4,207,000 ) Balance at March 31, 2023 19,494,615 $ 195,000 $ 231,836,000 $ 88,747,000 $ ( 303,000 ) $ 320,475,000 The accompanying notes to consolidated financial statements are an integral part hereof. F-4 Table of Contents MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Years Ended March 31, 2023 2022 2021 Cash flows from operating activities: Net (loss) income $ ( 4,207,000 ) $ 7,361,000 $ 21,476,000 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Depreciation and amortization 10,984,000 11,338,000 9,573,000 Amortization of intangible assets 1,460,000 1,548,000 1,571,000 Amortization and write-off of debt issuance costs 663,000 623,000 859,000 Amortization of interest on contract liabilities, net 940,000 879,000 924,000 Accrued interest on convertible notes, related party 9,000 - - Amortization of core premiums paid to customers 11,113,000 11,242,000 6,590,000 Amortization of finished goods premiums paid to customers 678,000 718,000 101,000 Non-cash lease expense 8,348,000 7,447,000 7,102,000 Foreign exchange impact of lease liabilities and forward contracts ( 9,291,000 ) ( 1,673,000 ) ( 17,606,000 ) Foreign currency remeasurement loss (gain) 1,408,000 48,000 ( 1,500,000 ) Loss due to the change in the fair value of the contingent consideration - 67,000 230,000 Loss (gain) on short-term investments 181,000 ( 163,000 ) ( 521,000 ) Net provision for inventory reserves 18,851,000 13,504,000 12,803,000 Net provision for customer payment discrepancies 2,112,000 2,142,000 694,000 Net provision for doubtful accounts 108,000 95,000 ( 1,000 ) Deferred income taxes ( 5,207,000 ) ( 7,442,000 ) ( 433,000 ) Share-based compensation expense 4,685,000 7,287,000 5,247,000 Loss on disposal of plant and equipment 17,000 36,000 29,000 Change in operating assets and liabilities, net of effects of acquisitions: Accounts receivable ( 37,176,000 ) ( 24,145,000 ) 28,364,000 Inventory 10,423,000 ( 95,529,000 ) ( 73,564,000 ) Inventory unreturned ( 1,531,000 ) ( 437,000 ) ( 5,514,000 ) Income tax receivable ( 2,030,000 ) 111,000 3,200,000 Prepaid expenses and other current assets ( 2,906,000 ) ( 682,000 ) ( 2,763,000 ) Other assets 435,000 122,000 523,000 Accounts payable and accrued liabilities ( 23,757,000 ) 17,453,000 55,958,000 Customer finished goods returns accrual ( 201,000 ) 6,533,000 6,138,000 Contract assets, net ( 17,560,000 ) ( 52,474,000 ) ( 43,871,000 ) Contract liabilities, net 17,719,000 48,056,000 45,118,000 Operating lease liabilities ( 7,141,000 ) ( 5,442,000 ) ( 6,376,000 ) Other liabilities ( 881,000 ) 6,515,000 1,738,000 Net cash (used in) provided by operating activities ( 21,754,000 ) ( 44,862,000 ) 56,089,000 Cash flows from investing activities: Purchase of plant and equipment ( 4,201,000 ) ( 7,550,000 ) ( 13,942,000 ) Proceeds from sale of plant and equipment - - 8,000 Redemptions of (payments for) short term investments 10,000 ( 388,000 ) ( 280,000 ) Net cash used in investing activities ( 4,191,000 ) ( 7,938,000 ) ( 14,214,000 ) Cash flows from financing activities: Borrowings under revolving loan 65,000,000 107,000,000 27,000,000 Repayments under revolving loan ( 74,800,000 ) ( 36,000,000 ) ( 95,000,000 ) Repayments of term loan ( 3,750,000 ) ( 3,750,000 ) ( 3,750,000 ) Proceeds from issuance of convertible notes, related party 32,000,000 - - Payments for debt issuance costs ( 1,716,000 ) ( 1,159,000 ) - Payments on finance lease obligations ( 2,397,000 ) ( 2,716,000 ) ( 2,442,000 ) Payment of contingent consideration - - ( 1,605,000 ) Exercise of stock options 940,000 499,000 719,000 Cash used to net share settle equity awards ( 969,000 ) ( 1,745,000 ) ( 350,000 ) Repurchase of common stock, including fees - ( 1,914,000 ) ( 1,139,000 ) Net cash provided by (used in) financing activities 14,308,000 60,215,000 ( 76,567,000 ) Effect of exchange rate changes on cash and cash equivalents 217,000 78,000 599,000 Net (decrease) increase in cash and cash equivalents ( 11,420,000 ) 7,493,000 ( 34,093,000 ) Cash and cash equivalents — Beginning of year 23,016,000 15,523,000 49,616,000 Cash and cash equivalents — End of year $ 11,596,000 $ 23,016,000 $ 15,523,000 Supplemental disclosures of cash flow information: Cash paid for interest, net $ 37,772,000 $ 13,994,000 $ 14,066,000 Cash paid for income taxes, net of refunds 14,198,000 6,746,000 3,027,000 Cash paid for operating leases 12,055,000 10,406,000 10,878,000 Cash paid for finance leases 2,659,000 3,061,000 2,821,000 Plant and equipment acquired under finance lease 1,246,000 836,000 4,102,000 Assets acquired under operating leases 7,832,000 16,187,000 16,484,000 Non-cash capital expenditures 6,000 661,000 857,000 Debt issuance costs included in accounts payable and accrued liabilities 476,000 - - The accompanying notes to consolidated financial statements are an integral part hereof. F-5 Table of Contents MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements 1. Company Background and Organization Motorcar Parts of America, Inc. and its subsidiaries (the “Company”, or “MPA”) is a leading supplier of automotive aftermarket non-discretionary replacement parts, and test solutions and diagnostic equipment. These replacement parts are primarily sold to automotive retail chain stores and warehouse distributors throughout North America and to major automobile manufacturers for both their aftermarket programs and warranty replacement programs (“OES”). The Company’s test solutions and diagnostic equipment primarily serves the global automotive component and powertrain testing market. The Company’s products include (i) light duty and heavy duty rotating electrical products such as alternators and starters, (ii) wheel hub assemblies and bearings, (iii) brake-related products, which include brake calipers, brake boosters, brake rotors, brake pads, brake shoes, and brake master cylinders, and (iv) other products, which include (a) turbochargers and (b) test solutions and diagnostic equipment including: (i) applications for combustion engine vehicles, including bench top testers for alternators and starters, (ii) 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). The Company primarily ships its products from its facilities, including the Company’s 410,000 square foot distribution center in Tijuana, Mexico, and various third-party warehouse distribution centers in North America. 2. Summary of Significant Accounting Policies Principles of Consolidation The accompanying consolidated financial statements include the accounts of Motorcar Parts of America, Inc. and its wholly owned subsidiaries. All significant inter-company accounts and transactions have been eliminated. Segment Reporting The Company’s 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, trucks 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, the Company’s operating segments met the aggregation criteria and were aggregated. Effective as of the fourth quarter of fiscal 2023, the Company revised its segment reporting as it determined that its three operating segments no longer met the criteria to be aggregated. The Company’s Hard Parts operating segment meets the criteria of a reportable segment. The Test Solutions and Diagnostic Equipment and Heavy Duty are not material, are not separately reportable, and are included within the “all other” category. See Note 19 for more information. Cash and Cash Equivalents Cash primarily consists of cash on hand and bank deposits. Cash equivalents consist of money market funds. The Company considers all highly liquid investments purchased with an original or remaining maturity of less than three months at the date of purchase to be cash equivalents. Cash and cash equivalents are maintained with various financial institutions. F-6 Table of Contents Accounts Receivable The Company’s accounts receivable are recorded at amortized cost less an allowance for credit losses that are not expected to be recovered. The net amount of accounts receivable and corresponding allowance for credit losses are presented in the consolidated balance sheets. The Company maintains allowances for credit losses resulting from the expected failure or inability of its customers to make required payments. The Company does not require collateral for accounts receivable. 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 has receivable discount programs that have been established with certain major customers and their respective banks. Under these programs, the Company has the option to sell those customers’ receivables to those banks at a discount to be agreed upon at the time the receivables are sold. Once the customer chooses which outstanding invoices are going to be made available for discounting, the Company can accept or decline the bundle of invoices provided. The receivable discount programs are non-recourse, and funds cannot be reclaimed by the customer or its bank after the related invoices have been discounted. Inventory Inventory is comprised of: (i) Used Core and component raw materials, (ii) work-in-process, (iii) remanufactured finished goods and purchased finished goods. Used Core, component raw materials, and purchased finished goods are stated at the lower of average cost or net realizable value. Work-in-process is in various stages of production and is valued at the average cost of Used Cores and component raw materials issued to work orders still open, including allocations of labor and overhead costs. Historically, work-in-process inventory has not been material compared to the total inventory balance. Remanufactured finished goods include: (i) the Used Core cost and (ii) the cost of component raw materials, and allocations of labor and variable and fixed overhead costs (the “Unit Cost”). The allocations of labor and variable and fixed overhead costs are based on the actual use of the production facilities over the prior 12 months which approximates normal capacity. This method prevents the distortion in allocated labor and overhead costs that would occur during short periods of abnormally low or high production. In addition, the Company excludes certain unallocated overhead such as severance costs, duplicative facility overhead costs, start-up costs, training, and spoilage from the calculation and expenses these unallocated overhead costs as period costs. Purchased finished goods also include an allocation of fixed overhead costs. The estimate of net realizable value is subjective and based on management’s judgment and knowledge of current industry demand and management’s projections of industry demand. The estimates may, therefore, be revised if there are changes in the overall market for the Company’s products or market changes that in management’s judgment impact its ability to sell or liquidate potentially excess or obsolete inventory. Net realizable value is determined at least quarterly as follows: F-7 Table of Contents • Net realizable value for finished goods by customer, by product line are determined based on the agreed upon selling price with the customer for a product in the trailing 12 months. The Company compares the average selling price, including any discounts and allowances, to the finished goods cost of on-hand inventory, less any reserve for excess and obsolete inventory. Any reduction of value is recorded as cost of goods sold in the period in which the revaluation is identified. • Net realizable value for Used Cores are determined based on current core purchase prices from core brokers to the extent that core purchases in the trailing 12 months are significant. Remanufacturing consumes, on average, more than one Used Core for each remanufactured unit produced since not all Used Cores are reusable. The yield rates depend upon both the product and consumer specifications. The Company purchases Used Cores from core brokers to supplement its yield rates and Used Cores not returned under the core exchange programs. The Company also considers the net selling price its customers have agreed to pay for Used Cores that are not returned under its core exchange programs to assess whether Used Core cost exceeds Used Core net realizable value on a by customer, by product line basis. Any reduction of core cost is recorded as cost of goods sold in the period in which the revaluation is identified. • The Company records an allowance for potentially excess and obsolete inventory based upon recent sales history, the quantity of inventory on-hand, and a forecast of potential use of the inventory. The Company periodically reviews inventory to identify excess quantities and part numbers that are experiencing a reduction in demand. Any part numbers with quantities identified during this process are reserved for at rates based upon management’s judgment, historical rates, and consideration of possible scrap and liquidation values which may be as high as 100 % of cost if no liquidation market exists for the part. As a result of this process, the Company recorded reserves for excess and obsolete inventory of $ 16,436,000 and $ 13,520,000 at 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 . The Company records vendor discounts as a reduction of inventories and are recognized as a reduction to cost of sales as the inventories are sold. Inventory Unreturned Inventory unreturned represents the Company’s estimate, based on historical data and prospective information provided directly by the customer, of finished goods shipped to customers that the Company expects to be returned under its general right of return policy, after the balance sheet date. Inventory unreturned includes only the Unit Cost of a finished good. The return rate is calculated based on expected returns within the normal operating cycle, which is generally one year . As such, the related amounts are classified in current assets. Inventory unreturned is valued in the same manner as the Company’s finished goods inventory. Contract Assets Contract assets consists of: (i) the core portion of the finished goods shipped to customers, (ii) upfront payments to customers in connection with customer contracts, (iii) core premiums paid to customers, (iv) finished goods premiums paid to customers, and (v) long-term core inventory deposits. 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, the Company expects the finished good containing the Remanufactured Core to be returned under the Company’s general right of return policy or a similar Used Core to be returned to the Company by the customer, under the Company’s core exchange programs, in each case for credit. The Remanufactured Cores and Used Cores returned by consumers to the Company’s customers but not yet returned to the Company are classified as “Cores expected to be returned by customers”, which are included in short-term contract assets until the Company physically receives them during its normal operating cycle, which is generally one year. F-8 Table of Contents Upfront payments to customers represent marketing allowances, such as sign-on bonuses, slotting fees, and promotional allowances provided by the Company to its customers. These allowances are recognized as an asset and amortized over the appropriate period of time as a reduction of revenue if the Company expects to generate future revenues associated with the upfront payment. If the Company does not expect to generate additional revenue, then the upfront payment is recognized in the consolidated statements of operations when payment occurs as a reduction of revenue. Upfront payments expected to be amortized during the Company’s 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. 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. The Company considers, among other things, the length of its largest ongoing customer relationships, duration of customer contracts, and the average life of vehicles on the road in determining the appropriate period of time over which to amortize these premiums. These core premiums are amortized over a period typically ranging from six to eight years , adjusted for specific circumstances associated with the arrangement. Core premiums are recorded as long-term contract assets. Core premiums expected to be amortized within the Company’s 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. The Company considers, among other things, the length of its largest ongoing customer relationships, duration of customer contracts, and the average life of vehicles on the road in determining the appropriate period of time over which to amortize these premiums. Finished goods premiums are amortized over a period typically ranging from six to eight years , adjusted for specific circumstances associated with the arrangement. 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. Long-term core inventory deposits represent the cost of Remanufactured Cores the Company has purchased from customers, which are held by the customers and remain on the customers’ premises. The costs of these Remanufactured Cores were established at the time of the transaction based on the then current cost. The selling value of these Remanufactured Cores was established based on agreed upon amounts with these customers. The Company expects to realize the selling value and the related cost of these Remanufactured Cores should its relationship with a customer end, a possibility that the Company considers remote based on existing long-term customer agreements and historical experience. Customer Finished Goods Returns Accrual The customer finished goods returns accrual represents the Company’s estimate of its exposure to customer returns, including warranty returns, under its general right of return policy to allow customers to return items that their end user customers have returned to them and from time to time, stock adjustment returns when the customers’ inventory of certain product lines exceeds the anticipated sales to end-user customers. The customer finished goods returns accrual represents the Unit Value of the estimated returns and is classified as a current liability due to the expectation that these returns will occur within the normal operating cycle of one year. Income Taxes The Company accounts for income taxes using the liability method, which measures deferred income taxes by applying enacted statutory rates in effect at the balance sheet date to the differences between the tax basis of assets and liabilities and their reported amounts in the financial statements. The resulting asset or liability is adjusted to reflect changes in the tax laws as they occur. A valuation allowance is provided to reduce deferred tax assets when it is more likely than not that a portion of the deferred tax asset will not be realized. The primary components of the Company’s income tax expense were (i) federal income taxes, (ii) state income taxes, (iii) foreign income taxed at rates that are different from the federal statutory rate, (iv) change in realizable deferred tax items, (v) impact of the non-deductible executive compensation under Internal Revenue Code Section 162(m), and (vi) income taxes associated with uncertain tax positions. F-9 Table of Contents Realization of deferred tax assets is dependent upon the Company’s ability to generate sufficient future taxable income. Significant judgment is required in determining the Company’s provision for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against the Company’s net deferred tax assets. The Company makes these estimates and judgments about its future taxable income that are based on assumptions that are consistent with the Company’s future plans. A valuation allowance is established when the Company believes it is not more likely than not all or some deferred tax assets will be realized. In evaluating the Company’s ability to recover deferred tax assets within the jurisdiction in which they arise, the Company considers all available positive and negative evidence. Deferred tax assets arising primarily as a result of net operating loss carry-forwards and research and development credits in connection with the Company’s Canadian operations have been offset completely by a valuation allowance due to the uncertainty of their utilization in future periods. Should the actual amount differ from the Company’s estimates, the amount of the valuation allowance could be impacted. The Company has made an accounting policy election to recognize the U.S. tax effects of global intangible low-taxed income as a component of income tax expense in the period the tax arises. Plant and Equipment Plant and equipment are stated at cost, less accumulated depreciation. The cost of additions and improvements are capitalized, while maintenance and repairs are charged to expense when incurred. Depreciation is provided on a straight-line basis in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives. Machinery and equipment are depreciated over a range from five to ten years . Office equipment and fixtures are depreciated over a range from three to ten years . Leasehold improvements are depreciated over the lives of the respective leases or the service lives of the leasehold improvements, whichever is shorter. Depreciation of assets recorded under finance leases is included in depreciation expense. The Company evaluates plant and equipment, including leasehold improvements, equipment, construction in progress, and right-of-use assets for impairment whenever events or circumstances indicate that the carrying value of an asset or asset group may not be recoverable. There was no impairment recorded during the years ended March 31, 2023, 2022, or 2021. Leases The Company determines if an arrangement contains a lease at inception. Lease assets and lease liabilities are recorded based on the present value of lease payments over the lease term, which includes the minimum unconditional term of the lease. Certain of the Company’s leases include options to extend the leases for up to five years . When the Company has the option to extend the lease term, terminate the lease before the contractual expiration date, or purchase the leased asset, and it is reasonably certain that it will exercise the option, the option is considered in determining the classification and measurement of the lease. The lease assets are recorded net of any lease incentives received. The Company exempts leases with an initial term of 12 months or less from balance sheet recognition and, for all classes of assets, combines non-lease components with lease components. Lease assets are tested for impairment in the same manner as long-lived assets used in operations. The Company uses its incremental borrowing rate for each of its leases in determining the present value of its expected lease payments based on the information available at the lease commencement date as the rate implicit for each of its leases is not readily detainable. The Company’s incremental borrowing rate is determined by analyzing and combining (i) an applicable risk-free rate, (ii) a financial spread adjustment, and (iii) any lease specific adjustment. Certain leases contain provisions for property-related costs that are variable in nature for which the Company is responsible, including common area maintenance and other property operating services, which are expensed as incurred and not included in the determination of lease assets and lease liabilities. These costs are calculated based on a variety of factors including property values, tax and utility rates, property services fees, and other factors. The Company records rent expense for operating leases, some of which have escalating rent payments, on a straight-line basis over the lease term. The Company has material non-functional currency leases. As required for other monetary liabilities, lessees shall remeasure a foreign currency-denominated lease liability using the exchange rate at each reporting date, but the lease assets are nonmonetary assets measured at historical rates, which are not affected by subsequent changes in the exchange rates. The Company recorded gains of $ 6,515,000 , $ 1,989,000 and $ 9,893,000 during the years ended March 31, 2023, 2022 and 2021, respectively, which are included in foreign exchange impact of lease liabilities and forward contracts in the consolidated statements of operations. See Note 10 for additional information regarding the Company’s leases. F-10 Table of Contents Goodwill The Company evaluates goodwill for impairment at least annually during the fourth quarter of each fiscal year or more frequently when an event occurs or circumstances change that indicate the carrying value may not be recoverable. The goodwill impairment test is performed at the reporting unit level, which represents the Company’s operating segments. In testing for goodwill impairment, the Company may elect to utilize a qualitative assessment to evaluate whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. If the Company’s qualitative assessment indicates that goodwill impairment is more likely than not, it will proceed with performing the quantitative assessment. If the fair value of the reporting unit exceeds its carrying value, goodwill is not considered impaired. If the carrying value of the reporting unit exceeds its fair value an impairment loss will be recognized for the amount by which the carrying value exceeds the reporting unit’s fair value. The Company completes the required annual testing of goodwill impairment for each of the reporting units during the fourth quarter of the year. No impairment was recorded during the years ended March 31, 2023, 2022, or 2021. Intangible Assets The Company’s intangible assets other than goodwill are finite–lived and amortized on a straight-line basis over their respective useful lives. The Company analyzes its finite-lived intangible assets for impairment when and if indicators of impairment exist. No impairment was recorded during the years ended March 31, 2023, 2022, or 2021. Debt Issuance Costs D ebt issuance costs include fees and costs incurred to obtain financing. Debt issuance costs related to the Company’s term loans and convertible notes are presented in the balance sheet as a direct deduction from carrying amounts of the respective debt. Debt issuance costs related to the Company’s revolving loan are presented in prepaid expenses and other current assets in the accompanying consolidated balance sheets, regardless of whether or not there are any outstanding borrowings under the revolving loan. These fees and costs are amortized using the straight-line method, which approximates the effective interest rate method, over the terms of the related loans and notes and are included in interest expense in the Company’s consolidated statements of operations . Foreign Currency Translation For financial reporting purposes, the functional currency of the foreign subsidiaries is the local currency. The assets and liabilities of foreign operations for which the local currency is the functional currency are translated into the U.S. dollar at the exchange rate in effect at the balance sheet date, while revenues and expenses are translated at average exchange rates during the year. The accumulated foreign currency translation adjustment is presented as a component of comprehensive income or loss in the consolidated statements of shareholders’ equity. During the year ended March 31, 2023, aggregate foreign currency transaction losses of $ 1,401,000 and gains of $ 239,000 and $ 1,144,000 for the years ended March 31, 2022 and 2021, respectively, were recorded in general and administrative expenses . Revenue Recognition Revenue is recognized when performance obligations under the terms of a contract with the Company’s customers are satisfied; generally, this occurs with the transfer of control of its products. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods or providing services. Revenue is recognized net of all anticipated returns, marketing allowances, volume discounts, and other forms of variable consideration . Revenue is recognized either when products are shipped or when delivered, depending on the applicable contract terms. F-11 Table of Contents The price of a finished remanufactured product sold to customers is generally comprised of separately invoiced amounts for the Remanufactured Core included in the product (“Remanufactured Core value”) and the unit portion included in the product (“Unit Value”), for which revenue is recorded based on our then current price list, net of applicable discounts and allowances. The Remanufactured Core value is recorded as a net revenue based upon the estimate of Used Cores that will not be returned by the customer for credit. These estimates are subjective and based on management’s judgment and knowledge of historical, current, and projected return rates. As reconciliations are completed with the customers the actual rates at which Used Cores are not being returned may differ from the current estimates. This may result in periodic adjustments of the estimated contract asset and liability amounts recorded and may impact the projected revenue recognition rates used to record the estimated future revenue. These estimates may also be revised if there are changes in contractual arrangements with customers, or changes in business practices. A significant portion of the remanufactured automotive parts sold to customers are replaced by similar Used Cores sent back for credit by customers under the core exchange programs (as described in further detail below). The number of Used Cores sent back under the core exchange programs is generally limited to the number of similar Remanufactured Cores previously shipped to each customer. Revenue Recognition — Core Exchange Programs Full price Remanufactured Cores: When remanufactured products are shipped, certain customers are invoiced for the Remanufactured Core value of the product at the full Remanufactured Core sales price. For these Remanufactured Cores, revenue is only recognized based upon an estimate of the rate at which these customers will pay cash for Remanufactured Cores in lieu of sending back similar Used Cores for credits under the core exchange programs. The remainder of the full price Remanufactured Core value invoiced to these customers is established as a long-term contract liability rather than being recognized as revenue in the period the products are shipped as the Company expects these Remanufactured Cores to be returned for credit under its core exchange programs. Nominal price Remanufactured Cores: Certain other customers are invoiced for the Remanufactured Core value of the product shipped at a nominal (generally $ 0.01 or less) Remanufactured Core price. For these nominal Remanufactured Cores, revenue is only recognized based upon an estimate of the rate at which these customers will pay cash for Remanufactured Cores in lieu of sending back similar Used Cores for credits under the core exchange programs. Revenue amounts are calculated based on contractually agreed upon pricing for these Remanufactured Cores for which the customers are not returning similar Used Cores. The remainder of the nominal price Remanufactured Core value invoiced to these customers is established as a long-term contract liability rather than being recognized as revenue in the period the products are shipped as the Company expects these Remanufactured Cores to be returned for credit under its core exchange programs. Revenue Recognition; General Right of Return Customers are allowed to return goods that their end-user customers have returned to them, whether or not the returned item is defective (warranty returns). In addition, under the terms of certain agreements and industry practice, customers from time to time are allowed stock adjustments when their inventory of certain product lines exceeds the anticipated sales to end-user customers (stock adjustment returns). Customers have various contractual rights for stock adjustment returns, which are typically less than 5 % of units sold. In some instances, a higher level of returns is allowed in connection with significant restocking orders. The aggregate returns are generally limited to less than 20 % of unit sales. 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. 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 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. The Remanufactured Core value of warranty and stock adjustment returns are provided for as indicated in the paragraph “Revenue Recognition – Core Exchange Programs”. F-12 Table of Contents As is standard in the industry, the Company only accepts returns from on-going customers. If a customer ceases doing business with the Company, it has no further obligation to accept additional product returns from that customer. Similarly, the Company accepts product returns and grants appropriate credits to new customers from the time the new customer relationship is established. Shipping Costs The Company includes shipping and handling charges in the gross invoice price to customers and classifies the total amount as revenue. All shipping and handling costs are expensed as cost of sales as inventory is sold. Contract Liability 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 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. Other marketing allowances, which may only be applied against future purchases, are recorded as a reduction to revenues in accordance with a schedule set forth in the relevant contract. Sales incentive amounts are recorded based on the value of the incentive provided. See Note 14 for a description of all marketing allowances. Customer allowances to be provided to customers within the Company’s normal operating cycle, which is generally one year, are considered short-term contract liabilities and the remainder are recorded as long-term contract liabilities. Accrued core payments represent the sales price of Remanufactured Cores purchased from customers, generally in connection with new business, which are held by these customers and remain on their premises. The sales price of these Remanufactured Cores will be realized when the Company’s relationship with a customer ends, a possibility that the Company considers remote based on existing long-term customer agreements and historical experience. The payments to be made to customers for purchases of Remanufactured Cores within the Company’s normal operating cycle, which is generally one year, are considered short-term contract liabilities and the remainder are recorded as long-term contract liabilities. Customer core returns accruals represent the full and nominally priced Remanufactured Cores shipped to the Company’s customers. When the Company ships the product, it recognizes an obligation to accept a similar Used Core sent back under the core exchange programs based upon the Remanufactured Core price agreed upon by the Company and its customer. The Contract liability related to Used Cores returned by consumers to the Company’s customers but not yet returned to the Company are classified as short-term contract liabilities until the Company physically receives these Used Cores as they are expected to be returned during the Company’s normal operating cycle, which is generally one year and the remainder are recorded as long-term contract liabilities. The core bank liability represents the full Remanufactured Core sales price paid for cores returned under the core exchange programs. The payment for these cores are made over a contractual repayment period pursuant to the Company’s agreement with this customer. Payments to be made within the Company’s normal operating cycle, which is generally one year, are considered short-term contract liabilities and the remainder are recorded as long-term contract liabilities. Finished goods liabilities represents the agreed upon price of finished goods purchased from customers, generally in connection with new business. The payment for these finished goods are made over a contractual repayment period pursuant to the Company’s agreement with the customer. Payments to be made within the Company’s normal operating cycle, which is generally one year, are considered short-term contract liabilities and the remainder are recorded as long-term contract liabilities. Customer deposits represent the receipt of prepayments from customers for the obligation to transfer goods or services in the future. The Company classifies these customer deposits as short-term contract liabilities as the Company expects to satisfy these obligations within its normal operating cycle, which is generally one year. F-13 Table of Contents Advertising Costs The Company expenses all advertising costs as incurred. Advertising expenses for the years ended March 31, 2023, 2022 and 2021 were $ 606,000 , $ 1,007,000 , and $ 507,000 , respectively. 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, warrants, and Convertible Notes (as defined in Note 8), 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. Years Ended March 31, 2023 2022 2021 Net (loss) income $ ( 4,207,000 ) $ 7,361,000 $ 21,476,000 Basic shares 19,340,246 19,119,727 19,023,145 Effect of dilutive stock options - 439,919 364,410 Diluted shares 19,340,246 19,559,646 19,387,555 Net (loss) income per share: Basic net (loss) income per share $ ( 0.22 ) $ 0.38 $ 1.13 Diluted net (loss) income per share $ ( 0.22 ) $ 0.38 $ 1.11 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 years ended March 31, 2023, 2022 and 2021, there were 1,854,795 , 725,998 , and 1,279,251 , respectively, of potential common shares not i ncluded in the calculation of diluted net (loss) income per share because their effect was anti-dilutive. In addition, for the year ended March 31, 2023, there were 5,846 of potential common shares not included in the calculation of diluted net (loss) income per share in under the “if-converted” method for the Convertible Notes because their effect was anti-dilutive . The potential common shares related to the Warrants (as defined below) issued in connection with the Convertible Notes (see Note 8) are anti-dilutive until they become exercisable and as of March 31, 2023, the Warrants were not exercisable. Use of Estimates The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. On an on-going basis, the Company evaluates its estimates, including allowances for credit losses, valuation of inventory, valuation of long-lived assets, goodwill and intangible assets, depreciation and amortization of long-lived assets, litigation matters, valuation of deferred tax assets, share-based compensation, sales returns and other customer marketing allowances, the incremental borrowing rate used in determining the present value of lease liabilities, and valuation of the embedded derivatives in connection with the convertible notes. Although the Company does not believe that there is a reasonable likelihood that there will be a material change in the future estimate or in the assumptions used in calculating the estimate, unforeseen changes in the industry, or business could materially impact the estimate and may have a material adverse effect on its business, financial condition and results of operations . F-14 Table of Contents Financial Instruments The carrying amounts of cash, short-term investments, accounts receivable, accounts payable and accrued liabilities approximate their fair value due to the short-term nature of these instruments. The carrying amounts of the revolving loan, term loan and other long-term liabilities approximate their fair value based on current rates for instruments with similar characteristics. The carrying amount of the convertible notes approximated their fair value as they were issued and sold on March 31, 2023 . Share-Based Payments The Company has share-based compensation plans and recognizes compensation expense over the requisite service period for its share-based plans based on the fair value of the awards on the date of the grant, award or issuance and accounts for forfeitures as they occur. Share-based plans include stock option awards, restricted stock units, restricted stock awards, and performance stock units issued under the Company’s incentive plans. The cost is measured at the grant date, based on the estimated fair value of the award using the Black-Scholes option pricing model for stock options, based on the closing share price of the Company’s stock on the grant date for restricted stock units and restricted stock awards, based on the closing share price of the Company’s stock on the grant date for performance stock units subject to performance conditions, and based on the estimated fair value of the award using the Monte Carlo valuation model for performance stock units subject to market conditions. See Note 18 for further information concerning the Company’s share-based payments. The Black-Scholes option-pricing model and Monte Carlo valuation model require the input of subjective assumptions including the expected volatility of the underlying stock and the expected holding period of the option. These subjective assumptions are based on both historical and other information. Changes in the values assumed and used in the model can materially affect the estimate of fair value. Credit Risk The Company regularly reviews its accounts receivable and allowance for credit losses by considering factors such as historical experience, credit quality and age of the accounts receivable, and the current economic conditions that may affect a customer’s ability to pay. The majority of the Company’s sales are to leading automotive aftermarket parts suppliers. The Company participates in trade accounts receivable discount programs with its major customers. If the creditworthiness of any of its customers was downgraded, the Company could be adversely affected, in that it may be subjected to higher interest rates on the use of these discount programs or it could be forced to wait longer for payment. Should the Company’s customers experience significant cash flow problems, its financial position and results of operations could be materially and adversely affected, and the maximum amount of loss that would be incurred would be the outstanding receivable balance, Used Cores expected to be returned by customers, and the value of the Remanufactured Cores held at customers’ locations. The Company maintains an allowance for credit losses that, in its opinion, provide for an adequate reserve to cover losses that may be incurred. Deferred Compensation Plan The Company has a deferred compensation plan for certain members of management. The plan allows participants to defer salary and bonuses. The assets of the plan, which are held in a trust and are subject to the claims of the Company’s general creditors under federal and state laws in the event of insolvency, are recorded as short-term investments in the consolidated balance sheets. Consequently, the trust qualifies as a Rabbi trust for income tax purposes. The plan’s assets consist primarily of mutual funds and are recorded at market value with any unrealized gain or loss recorded as general and administrative expense. The carrying value of plan assets were $ 2,011,000 and $ 2,202,000 , and the deferred compensation liability, which is included in other current liabilities in the accompanying consolidated balance sheets, was $ 2,011,000 and $ 2,202,000 at March 31, 2023 and 2022, respectively. During the years ended March 31, 2023, 2022, and 2021, the Company made contributions of $ 75,000 , $ 119,000 and $ 96,000 , respectively. During the year ended March 31, 2023, the Company redeemed $ 297,000 of its short-term investments for the payment of deferred compensation liabilities. During the year ended March 31, 2022, the Company did no t redeem any of its short-term investments for the payment of deferred compensation liabilities. F-15 Table of Contents The following summarizes the gain (loss) on the Company’s equity investments: Years Ended March 31, 2023 2022 2021 Net (loss) gain recognized on equity securities $ ( 181,000 ) $ 163,000 $ 521,000 Less: net (loss) gain recognized on equity securities sold ( 15,000 ) - 10,000 Unrealized (loss) gain recognized on equity securities still held $ ( 166,000 ) $ 163,000 $ 511,000 Comprehensive Income or Loss Comprehensive income or loss is defined as the change in equity during a period resulting from transactions and other events and circumstances from non-owner sources. The Company’s total comprehensive income or loss consists of net unrealized income or loss from foreign currency translation adjustments. 3. Goodwill and Intangible Assets Goodwill The Company had goodwill of $ 3,205,000 at March 31, 2023 and 2022 , which was comprised of $ 2,551,000 for the Hard Parts segment and $ 654,000 for all others, respectively. Intangible Assets The following is a summary of acquired intangible assets subject to amortization: March 31, 2023 March 31, 2022 Weighted Average Amortization Period Gross Carrying Value Accumulated Amortization Gross Carrying Value Accumulated Amortization Intangible assets subject to amortization 0 Trademarks 9 years $ 705,000 $ 577,000 $ 705,000 $ 513,000 Customer relationships 11 years 8,576,000 6,947,000 8,799,000 6,188,000 Developed technology 5 years 2,667,000 2,281,000 2,888,000 1,892,000 Total 9 years $ 11,948,000 $ 9,805,000 $ 12,392,000 $ 8,593,000 D uring the year ended March 31, 2023, the Company did no t retire any fully amortized intangible assets. During the year ended March 31, 2022 the Company retired $ 136,000 of fully amortized intangible assets . Amortization expense for acquired intangible assets is as follows: Years Ended March 31, 2023 2022 2021 Amortization expense $ 1,460,000 $ 1,548,000 $ 1,571,000 The estimated future amortization expense for acquired intangible assets subject to amortization is as follows: Year Ending March 31, 2024 $ 1,073,000 2025 486,000 2026 342,000 2027 242,000 Total $ 2,143,000 F-16 Table of Contents 4. 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 customer payment discrepancies, returned goods authorizations (“RGAs”) issued for in-transit unit returns, and allowances for credit losses. Accounts receivable — net is comprised of the following: March 31, 2023 March 31, 2022 Accounts receivable — trade $ 136,076,000 $ 98,734,000 Allowance for credit losses ( 339,000 ) ( 375,000 ) Customer payment discrepancies ( 1,634,000 ) ( 1,375,000 ) Customer returns RGA issued ( 14,235,000 ) ( 11,909,000 ) Less: total accounts receivable offset accounts ( 16,208,000 ) ( 13,659,000 ) Total accounts receivable — net $ 119,868,000 $ 85,075,000 5. Inventory Inventory is comprised of the following: March 31, 2023 March 31, 2022 Raw materials $ 147,880,000 $ 150,414,000 Work in process 7,033,000 6,880,000 Finished goods 201,198,000 226,729,000 356,111,000 384,023,000 Less allowance for excess and obsolete inventory ( 16,436,000 ) ( 13,520,000 ) Total $ 339,675,000 $ 370,503,000 Inventory unreturned $ 16,579,000 $ 15,001,000 F-17 Table of Contents 6. Contract Assets During the years ended March 31, 2023 and 2022, the Company reduced the carrying value of Remanufactured Cores held at customers’ locations by $ 3,736,000 and $ 4,671,000 , respectively. Contract assets are comprised of the following: March 31, 2023 March 31, 2022 Short-term contract assets Cores expected to be returned by customers $ 13,463,000 $ 15,778,000 Core premiums paid to customers 9,812,000 10,621,000 Upfront payments to customers 1,593,000 517,000 Finished goods premiums paid to customers 575,000 584,000 Total short-term contract assets $ 25,443,000 $ 27,500,000 Remanufactured cores held at customers’ locations $ 271,628,000 $ 258,376,000 Core premiums paid to customers 38,310,000 43,294,000 Long-term core inventory deposits 5,569,000 5,569,000 Finished goods premiums paid to customers 2,530,000 2,806,000 Upfront payments to customers 344,000 210,000 Total long-term contract assets $ 318,381,000 $ 310,255,000 7. Plant and Equipment Plant and equipment is comprised of the following: March 31, 2023 March 31, 2022 Machinery and equipment $ 62,556,000 $ 63,094,000 Office equipment and fixtures 32,769,000 31,434,000 Leasehold improvements 14,301,000 13,473,000 109,626,000 108,001,000 Less accumulated depreciation ( 63,574,000 ) ( 56,939,000 ) Total $ 46,052,000 $ 51,062,000 Plant and equipment located in the foreign countries where the Company has facilities, net of accumulated depreciation, totaled $ 40,609,000 and $ 44,348,000 , of which $ 37,667,000 and $ 40,912,000 is located in Mexico, at March 31, 2023 and 2022, respectively. 8. 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 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 the Company’s 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. F-18 Table of Contents 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. In addition, 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. On November 3, 2022, the Company 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 fiscal quarter ending September 30, 2022, (iii) modified the definition of “Consolidated EBITDA”, and (iv) replaces LIBOR as the benchmark rate with a replacement benchmark based on the Secured Overnight Financing Rate (“SOFR”) effective beginning November 3, 2022. The modifications to the financial covenants were effective as of September 30, 2022. As of December 31, 2022, the Company identified certain defaults with respect to the Credit Facility, which arose from non-compliance with certain financial covenants. On February 3, 2023, the Company entered into a fifth amendment to the Credit Facility, which among other things, (i) waived certain existing defaults and events of default 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 covenants 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, the Company entered into a sixth amendment to the Credit Facility, which among other things, (i) permitted the issuance of the Convertible Notes (as defined below) and the performance of its respective obligations under the Note Purchase Agreement (as defined below) and the Convertible Notes, (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. The Company was in compliance with all financial covenants as of March 31, 2023. The Company’s Term Loans are comprised of the following: March 31, 2023 March 31, 2022 Principal amount of Term Loans $ 13,125,000 $ 16,875,000 Unamortized financing fees ( 182,000 ) ( 181,000 ) Net carrying amount of Term Loans 12,943,000 16,694,000 Less current portion of Term Loans ( 3,664,000 ) ( 3,670,000 ) Long-term portion of Term Loans $ 9,279,000 $ 13,024,000 Future repayments of the Company’s Term Loans are as follows: Year Ending March 31, 2024 $ 3,750,000 2025 3,750,000 2026 3,750,000 2027 1,875,000 Total payments $ 13,125,000 F-19 Table of Contents The Company had $ 145,200,000 and $ 155,000,000 outstanding under the Revolving Facility at March 31, 2023 and 2022, respectively. In addition, $ 6,370,000 was reserved for letters of credit at March 31, 2023. At March 31, 2023, after certain adjustments, $ 87,050,000 was available under the Revolving Facility. Convertible Notes On March 31, 2023, the Company entered into a note purchase agreement (the “Note Purchase Agreement”) with Bison Capital Partners VI, L.P. and Bison Capital Partners VI-A, L.P. (collectively, the “Purchasers”) and Bison Capital Partners VI, L.P., as the purchaser representative (the “Purchaser Representative”) for the issuance and sale of $ 32,000,000 in aggregate principal amount of convertible notes due in 2029 (the “Convertible Notes”) to be used for general corporate purposes. The Convertible Notes will 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, the Company entered into the first amendment to the Note Purchase Agreement, which among other things, removed a provision that specified the Purchasers would be entitled to receive a dividend or distribution payable in certain circumstances. This amendment was effective as of March 31, 2023. The Company’s Convertible Notes are comprised of the following: March 31, 2023 Principal amount of Convertible Notes $ 32,000,000 Less: unamortized debt discount attributed to Compound Net Derivative Liability ( 8,430,000 ) Less: unamortized debt discount attributed to debt issuance costs ( 1,006,000 ) Carrying amount of the Convertible Notes 22,564,000 Plus: Compound Net Derivative Liability 8,430,000 Net carrying amount of Convertible Notes, related party $ 30,994,000 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 the Company’s 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, the Company had 28,650,590 shares of its common stock available to be issued if the Convertible Notes were converted. In connection with the Note Purchase Agreement, the Company entered into common stock warrants (the “Warrants”) with the Purchasers, which mature on March 30, 2029 . The Warrants do not become exercisable unless a Company Redemption (as defined below) occurs and the volume weighted average price of the Company’s 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. The Company estimates 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 the Company 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 the Company delivers a redemption notice, the Purchasers of the Convertible Notes may convert their Convertible Notes at any time at their option. Upon conversion, the Convertible Notes will be settled in shares of the Company’s common stock. 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. F-20 Table of Contents If there is a Fundamental Transaction, as defined in the Form of Convertible Promissory Note, the Company may redeem all or part of the Convertible Notes. Except in the case of the occurrence of a Fundamental Transaction, the Company may not redeem the Convertible Notes prior to March 31, 2026. After March 31, 2026, the Company may redeem all or part of the Convertible Notes for a cash purchase (the “Company Redemption”) price equal to the redemption price plus $ 4,000,000 , but only if (i) it is 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 the Company’s 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 the Company will pay the Redemption Price plus $ 2,000,000 . However, if the volume weighted average price of the Company’s common stock is less than $ 8 for 20 days between March 31, 2023 and September 27, 2023, the Company 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 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. The Company estimates 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 the Company or any of its subsidiaries; (iii) the entering of one or more final judgements or orders against the Company or any of its subsidiaries for an aggregate payment exceeding $ 25,000,000 ; (iv) the acceleration of senior debt; (v) certain failures of the Company to comply with certain provisions of the Note Purchase Agreement or material breaches of the Note Purchase Agreement by the Company or any of its 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 the Company or any subsidiary, or any subsidiary shall so claim in writing to challenge the validity of or the Company’s liability under the Note Purchase Agreement, the Convertible Notes, or the registration rights agreement; or (vii) the Company fails to maintain the listing of its capital stock on a national securities exchange. Events of 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, the Company 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 the Company (and not solely with respect to its 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. F-21 Table of Contents 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 the Company’s 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 the Company’s entry into the Note Purchase Agreement, Douglas Trussler was appointed to serve on its Board. Total contractual interest expense of $ 9,000 related to the Convertible Notes was recognized during the year ended March 31, 2023. There are no future payments required under the Convertible Notes prior to their maturity, therefore, the principal amount of the notes plus interest payable in kind, assuming no early redemption or conversion has occurred, of $ 56,704,000 would be paid on March 30, 2029. 9. Contract Liabilities Contract liabilities are comprised of the following: March 31, 2023 March 31, 2022 Short-term contract liabilities Customer allowances earned $ 19,997,000 $ 22,018,000 Customer core returns accruals 11,112,000 12,322,000 Customer deposits 3,232,000 3,306,000 Accrued core payment 3,056,000 1,679,000 Core bank liability 1,686,000 1,634,000 Finished goods liabilities 1,257,000 1,537,000 Total short-term contract liabilities $ 40,340,000 $ 42,496,000 Long-term contract liabilities Customer core returns accruals $ 170,420,000 $ 154,940,000 Core bank liability 13,582,000 15,267,000 Accrued core payment 9,171,000 928,000 Finished goods liabilities 433,000 1,588,000 Customer allowances earned - 41,000 Total long-term contract liabilities $ 193,606,000 $ 172,764,000 F-22 Table of Contents 10. Leases The Company leases various facilities in North America and Asia under operating leases expiring through August 2033. The Company also has finance leases for certain office and manufacturing equipment, which generally range from three to five years . The Company has material non-functional currency leases, which resulted in a remeasurement gains of $ 6,515,000 , $ 1,989,000 , and $ 9,893,000 during the years ended March 31, 2023, 2022, and 2021, respectively. These remeasurement gains are included in foreign exchange impact of lease liabilities and forward contracts in the consolidated statements of operations. Balance sheet information for leases is comprised of the following: March 31, 2023 March 31, 2022 Leases Classification Assets: Operating Operating lease assets $ 87,619,000 $ 81,997,000 Finance Plant and equipment 5,549,000 7,470,000 Total leased assets $ 93,168,000 $ 89,467,000 Liabilities: Current Operating Operating lease liabilities $ 8,767,000 $ 6,788,000 Finance Other current liabilities 1,851,000 2,330,000 Long-term Operating Long-term operating lease liabilities 79,318,000 80,803,000 Finance Other liabilities 2,742,000 3,425,000 Total lease liabilities $ 92,678,000 $ 93,346,000 F-23 Table of Contents Lease cost recognized in the consolidated statement of operations is comprised of the following: Years Ended March 31, 2023 2022 2021 Lease cost Operating lease cost $ 13,176,000 $ 12,472,000 $ 11,527,000 Short-term lease cost 1,686,000 1,462,000 1,383,000 Variable lease cost 761,000 1,011,000 825,000 Finance lease cost: Amortization of finance lease assets 1,983,000 2,088,000 1,762,000 Interest on finance lease liabilities 262,000 345,000 379,000 Total lease cost $ 17,868,000 $ 17,378,000 $ 15,876,000 Maturities of lease commitments at March 31, 2023 were as follows: Maturity of lease liabilities by fiscal year Operating Leases Finance Leases Total 2024 $ 13,567,000 $ 2,064,000 $ 15,631,000 2025 12,535,000 1,569,000 14,104,000 2026 12,099,000 837,000 12,936,000 2027 10,816,000 346,000 11,162,000 2028 10,725,000 186,000 10,911,000 Thereafter 53,929,000 6,000 53,935,000 Total lease payments 113,671,000 5,008,000 118,679,000 Less amount representing interest ( 25,586,000 ) ( 415,000 ) ( 26,001,000 ) Present value of lease liabilities $ 88,085,000 $ 4,593,000 $ 92,678,000 Other information about leases is as follows: March 31, 2023 March 31, 2022 Lease term and discount rate Weighted-average remaining lease term (years): Finance leases 2.9 2.9 Operating leases 9.0 10.4 Weighted-average discount rate: Finance leases 5.9 % 5.1 % Operating leases 5.8 % 5.7 % F-24 Table of Contents 11. Accounts Receivable Discount Programs The Company uses receivable discount programs with certain customers and their respective banks. Under these programs, the Company may sell those customers’ receivables to those banks at a discount to be agreed upon at the time the receivables are sold. These discount arrangements allow the Company to accelerate receipt of payment on customers’ receivables. The following is a summary of the Company’s accounts receivable discount programs: Fiscal Years Ended March 31, 2023 2022 Receivables discounted $ 548,376,000 $ 525,441,000 Weighted average days 328 336 Weighted average discount rate 5.3 % 1.9 % Amount of discount as interest expense $ 26,432,000 $ 9,197,000 12. Financial Risk Management and Derivatives Purchases and expenses denominated in currencies other than the U.S. dollar, which are primarily related to the Company’s facilities overseas, expose the Company to market risk from material movements in foreign exchange rates between the U.S. dollar and the foreign 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 forward foreign currency exchange contracts are designated for forecasted expenditure requirements to fund foreign operations. The Company had forward foreign currency exchange contracts with a U.S. dollar equivalent notional value of $ 48,486,000 and $ 44,968,000 at March 31, 2023 and 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 consolidated statements of operations . The following shows the effect of the Company’s derivative instruments on its consolidated statements of operations: Gain (Loss) Recognized as Foreign Exchange Impact of Lease Liabilities and Forward Contracts Derivatives Not Designated as Years Ended March 31, Hedging Instruments 2023 2022 2021 Forward foreign currency exchange contracts $ 2,776,000 $ ( 316,000 ) $ 7,713,000 The fair value of the forward foreign currency exchange contracts of $ 3,889,000 and $ 1,113,000 are included in prepaid and other current assets in the consolidated balance sheets at March 31, 2023 and 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 consolidated statements of cash flows for the years ended March 31, 2023, 2022, and 2021. F-25 Table of Contents 13. Fair Value Measurements The Company defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company uses a three-tier valuation hierarchy based upon observable and unobservable inputs: • Level 1 — Valuation is based upon quoted prices (unadjusted) in active markets for identical assets or liabilities. • Level 2 — Valuation is based upon quoted prices for similar assets and liabilities in active markets, or other inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. • Level 3 — Valuation is based upon unobservable inputs that are significant to the fair value measurement. The fair value hierarchy requires the use of observable market data when available. In instances in which the inputs used to measure fair value fall into different levels of the fair value hierarchy, the fair value measurement has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular item to the fair value measurement in its entirety requires judgment, including the consideration of inputs specific to the asset or liability. The following sets forth by level within the fair value hierarchy, the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis according to the valuation techniques the Company used to determine their fair values at: March 31, 2023 March 31, 2022 Fair Value Measurements Fair Value Measurements Using Inputs Considered as Using Inputs Considered as Fair Value Level 1 Level 2 Level 3 Fair Value Level 1 Level 2 Level 3 Assets Short-term investments Mutual funds $ 2,011,000 $ 2,011,000 $ - $ - $ 2,202,000 $ 2,202,000 $ - $ - Prepaid expenses and other current assets Forward foreign currency exchange contracts 3,889,000 - 3,889,000 - 1,113,000 - 1,113,000 - Liabilities Other current liabilities Deferred compensation 2,011,000 2,011,000 - - 2,202,000 2,202,000 - - Convertible notes, related party Compound Net Derivative Liability 8,430,000 - - 8,430,000 - - - - Short-term Investments and Deferred Compensation The Company’s short-term investments, which fund its deferred compensation liabilities, consist of investments in mutual funds. These investments are classified as Level 1 as the shares of these mutual funds trade with sufficient frequency and volume to enable the Company to obtain pricing information on an ongoing basis. Forward Foreign Currency Exchange Contracts The forward foreign currency exchange contracts are primarily measured based on the foreign currency spot and forward rates quoted by the banks or foreign currency dealers (See Note 12). Compound Net Derivative Liability In connection with the issuance of the Convertible Notes on March 31, 2023, the Company estimates the fair value of the Compound Net Derivative Liability (see Note 8) using Level 3 inputs and the Monte Carlo simulation model at the balance sheet date. The Monte Carlo simulation model requires the input of subjective assumptions including the expected volatility of the underlying stock. These subjective assumptions are based on both historical and other information. Changes in the values assumed and used in the model can materially affect the estimate of fair value. This amount is recorded within convertible notes, related party in the consolidated balance sheet at March 31, 2023. The Company estimates the fair value of the Compound Net Derivative Liability using Level 3 inputs and the Monte Carlo simulation model 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. F-26 Table of Contents The following assumptions were used to determine the fair value of the Compound Net Derivative Liability: March 31, 2023 Risk free interest rate 3.64 % Cost of equity 21.80 % Weighted average cost of capital 14.60 % Expected volatility of MPA Common Stock 50.00 % EBITDA volatility 35.00 % The following summarizes the activity for Level 3 fair value measurements: Years Ended March 31, 2023 Beginning balance $ - Newly issued 8,430,000 Changes in revaluation of Compound Net Derivative Liability included in earnings - Exercises/settlements - Ending balance $ 8,430,000 During the years ended March 31, 2023 and 2022, the Company had no significant measurements of assets or liabilities at fair value on a nonrecurring basis subsequent to their initial recognition. The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their fair value due to the short-term nature of these instruments. The carrying amounts of the revolving loan, term loan and other long-term liabilities approximate their fair value based on the variable nature of interest rates and current rates for instruments with similar characteristics. The carrying amount of the Convertible Notes approximated their fair value as they were issued on March 31, 2023 . 14. 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 total unit sales. Amounts charged to expense for these warranty returns are considered in arriving at the Company’s net sales. The following summarizes the changes in the warranty return accrual: Years Ended March 31, 2023 2022 2021 Balance at beginning of year $ 20,125,000 $ 21,093,000 $ 18,300,000 Charged to expense 132,719,000 118,675,000 111,025,000 Amounts processed ( 133,014,000 ) ( 119,643,000 ) ( 108,232,000 ) Balance at end of year $ 19,830,000 $ 20,125,000 $ 21,093,000 F-27 Table of Contents Commitments to Provide Marketing Allowances under Long-Term Customer Contracts The Company has or is renegotiating long-term agreements with many of its major customers. Under these agreements, which in most cases have initial terms of at least four years , the Company is designated as the exclusive or primary supplier for specified categories of the Company’s products. Because of the very competitive nature of the market and the limited number of customers for these products, the Company’s customers have sought and obtained price concessions, significant marketing allowances, and more favorable delivery and payment terms in consideration for the Company’s designation as a customer’s exclusive or primary supplier. These incentives differ from contract to contract and can include (i) the issuance of a specified amount of credits against receivables in accordance with a schedule set forth in the relevant contract, (ii) support for a particular customer’s research or marketing efforts provided on a scheduled basis, (iii) discounts granted in connection with each individual shipment of product, and (iv) other marketing, research, store expansion or product development support. These contracts typically require that the Company meet ongoing performance standards. While these longer-term agreements strengthen the Company’s customer relationships, the increased demand for the Company’s products often requires that the Company increase its inventories and personnel. Customer demands that the Company purchase their Remanufactured Core inventory also require the use of the Company’s working capital. The marketing and other allowances the Company typically grants its customers in connection with its new or expanded customer relationships adversely impact the near-term revenues, profitability, and associated cash flows from these arrangements. Such allowances include sales incentives and concessions and typically consist of: (i) allowances which may only be applied against future purchases and are recorded as a reduction to revenues in accordance with a schedule set forth in the long-term contract, (ii) allowances related to a single exchange of product that are recorded as a reduction of revenues at the time the related revenues are recorded or when such incentives are offered, and (iii) amortization of core premiums paid to customers generally in connection with new business. The following summarizes the breakout of allowances discussed above, recorded as a reduction to revenues: Years Ended March 31, 2023 2022 2021 Allowances incurred under long-term customer contracts $ 18,253,000 $ 19,348,000 $ 29,238,000 Allowances related to a single exchange of product 154,194,000 129,283,000 99,768,000 Amortization of core premiums paid to customers 11,113,000 11,242,000 6,590,000 Total customer allowances recorded as a reduction of revenues $ 183,560,000 $ 159,873,000 $ 135,596,000 The following presents the Company’s commitments to incur allowances, excluding allowances related to a single exchange of product, which will be recognized as a reduction to revenue when the related revenue is recognized: Year Ending March 31, 2024 $ 14,637,000 2025 11,621,000 2026 10,605,000 2027 9,939,000 2028 9,198,000 Thereafter 7,976,000 Total marketing allowances $ 63,976,000 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 (“Audit”), the U.S. Customs and Border Protection (“CBP”) stated that it believed that the Company owed additional duties relating to products that it imported from Mexico from 2011 through mid-2018. The CBP recently requested that the Company pay additional duties of approximately $ 3,900,000 from 2011 through mid-2018 related to the findings of the Audit. The Company does not believe that this amount is correct and believes that it has numerous defenses and is disputing this amount vigorously. The Company cannot assure that the CBP will agree or that it will not need to accrue or pay additional amounts in the future. F-28 Table of Contents 15. Significant Customer and Other Information Significant Customer Concentrations While the Company continually seeks to diversify its customer base, it currently derives, and has historically derived, a substantial portion of its sales from a small number of large customers. Any meaningful reduction in the level of sales to any of these customers, deterioration of the financial condition of any of these customers or the loss of any of these customers could have a materially adverse impact on our business, results of operations, and financial condition. The Company’s largest customers accounted for the following total percentage of net sales: Years Ended March 31, 2023 2022 2021 Customer A 37 % 38 % 42 % Customer B 23 % 18 % 22 % Customer C 24 % 29 % 23 % Customer D 4 % 2 % 2 % Revenues for Customers A through C were derived from the Hard Parts segment and Test Solutions and Diagnostic Equipment segment. Revenues for Customer D were derived from the Hard Parts segment. The Company’s largest customers accounted for the following total percentage of accounts receivable — trade: March 31, 2023 March 31, 2022 Customer A 33 % 42 % Customer B 18 % 21 % Customer C 21 % 9 % Customer D 12 % 5 % Geographic and Product Information The Company’s products are predominantly sold in the U.S. and accounted for the following total percentage of net sales: Years Ended March 31, 2023 2022 2021 Rotating electrical products 67 % 69 % 73 % Wheel hub products 11 % 13 % 15 % Brake-related products 18 % 15 % 10 % Other products 4 % 3 % 2 % 100 % 100 % 100 % Significant Supplier Concentrations No suppliers accounted for more than 10% of the Company’s inventory purchases for the years ended March 31, 2023, 2022, and 2021. F-29 Table of Contents 16. Income Taxes Domestic and foreign components of income (loss) before income taxes are as follows: Years Ended March 31, 2023 2022 2021 United States $ ( 14,470,000 ) $ 6,021,000 $ 13,920,000 Foreign 11,361,000 7,128,000 16,943,000 (Loss) income before income taxes ( 3,109,000 ) 13,149,000 30,863,000 The income tax expense is as follows: Years Ended March 31, 2023 2022 2021 Current tax expense Federal $ 2,483,000 $ 8,572,000 $ 5,734,000 State 396,000 1,478,000 722,000 Foreign 3,426,000 3,180,000 3,364,000 Total current tax expense 6,305,000 13,230,000 9,820,000 Deferred tax (benefit) expense Federal ( 5,037,000 ) ( 6,411,000 ) ( 1,909,000 ) State ( 705,000 ) ( 659,000 ) 118,000 Foreign 535,000 ( 372,000 ) 1,358,000 Total deferred tax benefit ( 5,207,000 ) ( 7,442,000 ) ( 433,000 ) Total income tax expense $ 1,098,000 $ 5,788,000 $ 9,387,000 F-30 Table of Contents Deferred income taxes consist of the following: March 31, 2023 March 31, 2022 Assets Allowance for bad debts $ 78,000 $ 99,000 Customer allowances earned 4,760,000 5,321,000 Allowance for stock adjustment returns 2,391,000 1,651,000 Inventory adjustments 7,817,000 3,815,000 Intangibles, net 809,000 785,000 Stock options 2,770,000 2,984,000 Operating lease liabilities 23,408,000 23,894,000 Estimate for returns 26,670,000 25,445,000 Accrued compensation 2,718,000 3,515,000 Net operating losses 5,351,000 4,617,000 Tax credits 2,012,000 2,018,000 Other 5,046,000 3,833,000 Total deferred tax assets $ 83,830,000 $ 77,977,000 Liabilities Plant and equipment, net ( 79,000 ) ( 1,051,000 ) Contract assets ( 12,357,000 ) ( 13,873,000 ) Operating lease assets ( 25,004,000 ) ( 23,421,000 ) Other ( 6,864,000 ) ( 5,960,000 ) Total deferred tax liabilities $ ( 44,304,000 ) $ ( 44,305,000 ) Less valuation allowance $ ( 7,619,000 ) $ ( 6,816,000 ) Total $ 31,907,000 $ 26,856,000 As of March 31, 2023, before tax effect, the Company had federal net operating loss carryforwards of $ 1,361,000 related to its January 2019 acquisition, state net operating loss carryforwards of $ 649,000 and foreign net operating loss carryforwards of $ 19,012,000 . The federal net operating loss carryforwards expire beginning in fiscal year 2033 , the state net operating loss carryforwards expire beginning in fiscal year 2033 , and the foreign net operating loss carryforwards expire beginning in fiscal year 2038 . As of March 31, 2023, the Company also had non-US tax credit carryforwards of $ 2,012,000 , which will expire beginning in fiscal year 2034 . A full valuation allowance was established on the federal and foreign net operating loss and tax credits carryforward as the Company believes it is more likely than not these tax attributes would not be realizable in the future. The net increase in the valuation allowance was $ 803,000 during the year ended March 31, 2023. Realization of deferred tax assets is dependent upon the Company’s ability to generate sufficient future taxable income. Significant judgment is required in determining the Company’s provision for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against the Company’s net deferred tax assets. The Company makes these estimates and judgments about its future taxable income that are based on assumptions that are consistent with the Company’s future plans. A valuation allowance is established when the Company believes it is not more likely than not all or some deferred tax assets will be realized. In evaluating the Company’s ability to recover deferred tax assets within the jurisdiction in which they arise, the Company considers all available positive and negative evidence. Deferred tax assets arising primarily as a result of non-US net operating loss carry-forwards and non-US research and development credits in connection with the Company’s Canadian operations have been offset completely by a valuation allowance due to the uncertainty of their utilization in future periods. Should the actual amount differ from the Company’s estimates, the amount of the valuation allowance could be impacted. For the years ended March 31, 2023, 2022, and 2021, the primary components of the Company’s income tax expense were (i) federal income taxes, (ii) state income taxes, (iii) foreign income taxed at rates that are different from the federal statutory rate, (iv) change in realizable deferred tax items, (v) impact of the non-deductible executive compensation under Internal Revenue Code Section 162(m), and (vi) income taxes associated with uncertain tax positions F-31 Table of Contents The difference between the income tax expense at the federal statutory rate and the Company’s effective tax rate is as follows: Years Ended March 31, 2023 2022 2021 Statutory federal income tax rate 21.0 % 21.0 % 21.0 % State income tax rate, net of federal benefit 3.5 % 4.1 % 2.2 % Foreign income taxed at different rates ( 28.7 )% 4.9 % 1.9 % Non-deductible executive compensation ( 9.0 )% 7.2 % 1.9 % Change in valuation allowance ( 25.8 )% 5.0 % 2.2 % Uncertain tax positions ( 1.0 )% 6.1 % 0.3 % Research and development credit 2.7 % ( 0.9 )% ( 0.3 )% Net operating loss carryback - % ( 0.4 )% - % Other 2.0 % ( 3.0 )% 1.2 % ( 35.3 )% 44.0 % 30.4 % The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions with varying statutes of limitations. At March 31, 2023, the Company is not under examination in any jurisdiction and the years ended March 31, 2018 through 2023 remain subject to examination. The Company believes no significant changes in the unrecognized tax benefits will occur within the next 12 months. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows: Years Ended March 31, 2023 2022 2021 Balance at beginning of period $ 1,975,000 $ 1,104,000 $ 1,011,000 Additions based on tax positions related to the current year 53,000 352,000 249,000 Additions for tax positions of prior year - 581,000 67,000 Reductions for tax positions of prior year ( 64,000 ) ( 62,000 ) ( 223,000 ) Balance at end of period $ 1,964,000 $ 1,975,000 $ 1,104,000 At March 31, 2023, 2022 and 2021, there are $ 1,616,000 , $ 1,632,000 , and $ 923,000 , respectively, of unrecognized tax benefits that if recognized would affect the annual effective tax rate. The Company recognizes interest and penalties related to unrecognized tax benefits as part of income tax expense. During the years ended March 31, 2023, 2022, and 2021, the Company recognized interest and penalties of approximately $ 59,000 , $ 112,000 , and $( 16,000 ), respectively. The Company had approximately $ 229,000 and $ 170,000 for the payment of interest and penalties accrued at March 31, 2023 and 2022, respectively. With the exception of its earnings from its Singapore subsidiary, the Company intends to indefinitely reinvest its undistributed earnings from foreign subsidiaries in foreign operations. No incremental U.S. Federal tax or withholding taxes have been provided for these earnings. 17. Defined Contribution Plans The Company has a 401(k) plan covering all employees who are 21 years of age with at least six months of service. The plan permits eligible employees to make contributions up to certain limitations, with the Company matching 50 % of each participating employee’s contribution up to the first 6 % of employee compensation. Employees are immediately vested in their voluntary employee contributions and vest in the Company’s matching contributions ratably over five years . The Company’s matching contribution to the 401(k) plan was $ 549,000 , $ 578,000 , and $ 507,000 for the years ended March 31, 2023, 2022, and 2021, respectively. F-32 Table of Contents 18. Share-based Payments In September 2022, the Company’s shareholders approved the 2022 Incentive Award Plan (the “2022 Plan”), which replaced the 2010 Incentive Award Plan and the 2014 Non-Employee Director Incentive Award Plan. Under the 2022 Plan, a total of 924,200 shares of the Company’s common stock were reserved for grants to its employees, non-employee directors, and consultants. At March 31, 2023, there were 52,768 shares of restricted stock units outstanding and 871,432 shares of common stock were available for grant under this plan. At March 31, 2023 and 2022, 10,417 and 82,324 of restricted stock units, respectively, were outstanding under the 2014 Non-Employee Director Incentive Award Plan. No shares of common stock remain available for grant under this plan. At March 31, 2023 and 2022, respectively, there was (i) 266,169 and 216,739 shares of restricted stock units were outstanding, (ii) options to purchase 1,226,745 and 1,674,499 shares of common stock were outstanding, (iii) 100,000 and 100,000 restricted shares were outstanding, and (iv) 192,696 and 84,593 shares of performance stock units were outstanding under the 2010 Incentive Award Plan. No shares of common stock remain available for grant under this plan. In addition, at March 31, 2023 and 2022, options to purchase 6,000 and 21,000 shares of common stock, respectively, were outstanding under the 2004 Non-Employee Director Stock Option Plan. No options remain available for grant under this plan. Stock Options The Company did no t grant any stock options during the year ended March 31, 2023 and 2022. The following summarizes the Black-Scholes option-pricing model assumptions used to derive the weighted average fair value of the stock options granted during the year ended March 31, 2021. Years Ended March 31, 2021 Weighted average risk free interest rate 0.44 % Weighted average expected holding period (years) 5.96 Weighted average expected volatility 44.90 % Weighted average expected dividend yield - Weighted average fair value of options granted $ 6.43 The following is a summary of stock option transactions: Number of Weighted Average Shares Exercise Price Outstanding at March 31, 2022 1,695,499 $ 17.53 Granted - $ - Exercised ( 326,469 ) $ 6.75 Forfeited/Cancelled ( 123,932 ) $ 19.45 Expired ( 12,353 ) $ 15.91 Outstanding at March 31, 2023 1,232,745 $ 20.20 At March 31, 2023, options to purchase 96,495 shares of common stock were unvested at the weighted average exercise price of $ 15.16 . F-33 Table of Contents Based on the market value of the Company’s common stock at March 31, 2023, 2022, and 2021, the pre-tax intrinsic value of options exercised was $ 2,427,000 , $ 245,000 , and $ 546,000 , respectively. The total fair value of stock options vested during the years ended March 31, 2023, 2022, and 2021 was $ 1,140,000 , $ 2,174,000 , and $ 2,184,000 , respectively. The following summarizes information about the options outstanding at March 31, 2023: Options Outstanding Options Exercisable Weighted Weighted Weighted Average Weighted Average Average Remaining Aggregate Average Remaining Aggregate Range of Exercise Life Intrinsic Exercise Life Intrinsic Exercise price Shares Price In Years Value Shares Price In Years Value $ 6.48 to $ 18.20 405,418 $ 13.33 4.83 308,923 $ 12.76 4.08 $ 18.21 to $ 22.83 438,637 19.58 5.78 438,637 19.58 5.78 $ 22.84 to $ 28.04 178,566 26.27 3.50 178,566 26.27 3.50 $ 28.05 to $ 31.13 210,124 29.60 2.95 210,124 29.60 2.95 1,232,745 $ 20.20 4.66 $ - 1,136,250 $ 20.63 4.44 $ - The aggregate intrinsic values in the above table represent the pre-tax value of all in-the-money options if all such options had been exercised on March 31, 2023 based on the Company’s closing stock price of $ 7.44 as of that date. At March 31, 2023, there was $ 132,000 of total unrecognized compensation expense from stock-based compensation granted under the plans, which is related to non-vested shares. The compensation expense is expected to be recognized over a weighted average vesting period of three months . Restricted Stock Units and Restricted Stock (collectively “RSUs”) During the years ended March 31, 2023 and 2022, the Company granted (i) performance-based restricted stock awards which had a threshold performance level of 33,333 shares, a target performance level of 66,667 shares, and a maximum performance level of 100,000 shares at the grant date for both periods and (ii) 229,121 and 163,703 of time-based vesting restricted stock units, respectively. The estimated grant date fair value of the RSUs $ 4,430,000 , $ 5,775,000 , and $ 4,150,000 , for the years ended March 31, 2023, 2022, and 2021, respectively, which was based on the closing market price on the date of grant. The fair value related to these awards is recognized as compensation expense over the vesting period. These awards generally vest in three equal installments beginning each anniversary from the grant date, subject to continued employment. Upon vesting, these awards may be net share settled to cover the required withholding tax with the remaining amount converted into an equivalent number of shares of common stock. Total shares withheld during the years ended March 31, 2023 and 2022 were 74,854 and 84,762 , respectively, based on the value of these awards as determined by the Company’s closing stock price on the vesting date. The following is a summary of non-vested RSUs: Number of Shares Weighted Average Grant Date Fair Value Outstanding at March 31, 2022 399,063 $ 19.98 Granted 329,121 $ 13.46 Vested ( 228,519 ) $ 20.08 Forfeited/Cancelled ( 70,311 ) $ 19.15 Outstanding at March 31, 2023 429,354 $ 15.07 As of March 31, 2023, there was $ 3,289,000 of unrecognized compensation expense related to these awards, which will be recognized over the remaining vesting period of approximately 1.5 years. The Company’s unrecognized compensation expense includes restricted stock awards at the target performance level as deemed probable at each quarter-end. F-34 Table of Contents Performance Stock Units (“PSUs”) During the years ended March 31, 2023 and 2022, the Company granted 126,028 and 84,593 of performance-based PSUs (at target performance levels), respectively, to its executives, which typically cliff vest after three-years subject to continued employment. These awards are contingent and granted separately for each of the following metrics: adjusted EBITDA, net sales, and relative total shareholder return (“TSR”). Compensation cost is determined at the grant date 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. 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: Year Ended March 31, 2023 2022 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/Cancelled ( 17,925 ) $ 19.95 Outstanding at March 31, 2023 192,696 $ 17.48 At March 31, 2023, there was $ 1,926,000 of unrecognized compensation expense related to these awards, which will be recognized over the weighted average remaining vesting period of approximately 1.9 years. F-35 Table of Contents 19. Segment Information Pursuant to the guidance provided under the Financial Accounting Standards Board Accounting Standards Codification 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 identified its Chief Executive Officer as the CODM. The criteria the Company used to identify the reportable segments are primarily the nature of the products the Company sells, the Company’s organizational and management reporting structure, and the operating results that are regularly reviewed by the Company’s CODM to make decisions about the resources to be allocated to the business units and to assess performance. The Company’s three operating segments are: • Hard Parts , including (i) light duty rotating electric products such as alternators and starters, (ii) wheel hub products, (iii) brake-related products, including brake calipers, brake boosters, brake rotors, brake pads and brake master cylinders, and (iv) turbochargers, • Test Solutions and Diagnostic Equipment , including (i) applications for combustion engine vehicles, including bench top testers for alternators and starters, (ii) 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, trucks 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, the Company’s operating segments met the aggregation criteria and were aggregated. Effective as of the fourth quarter of fiscal 2023, the Company revised its segment reporting as it determined that its three operating segments no longer met the criteria to be aggregated. The Company’s Hard Parts operating segment meets the criteria of a reportable segment while Test Solutions and Diagnostic Equipment and Heavy Duty are not material, are not separately reportable, and are included within the “all other” category. F-36 Table of Contents Financial information relating to the Company’s segments is as follows: March 31, 2023 Hard Parts All Other Total Net sales to external customers $ 638,460,000 $ 44,614,000 $ 683,074,000 Intersegment sales 600,000 192,000 792,000 Operating income (loss) 44,855,000 ( 8,303,000 ) 36,552,000 Depreciation and amortization 10,955,000 1,489,000 12,444,000 Segment assets 1,032,739,000 49,778,000 1,082,517,000 Capital expenditures 3,459,000 742,000 4,201,000 March 31, 2022 Hard Parts All Other Total Net sales to external customers $ 609,992,000 $ 40,316,000 $ 650,308,000 Intersegment sales 831,000 2,502,000 3,333,000 Operating income (loss) 32,265,000 ( 3,544,000 ) 28,721,000 Depreciation and amortization 11,345,000 1,541,000 12,886,000 Segment assets 1,017,475,000 47,488,000 1,064,963,000 Capital expenditures 6,630,000 920,000 7,550,000 March 31, 2021 Hard Parts All Other Total Net sales to external customers $ 512,251,000 $ 28,531,000 $ 540,782,000 Intersegment sales 560,000 1,898,000 2,458,000 Operating income (loss) 48,450,000 ( 1,830,000 ) 46,620,000 Depreciation and amortization 9,744,000 1,400,000 11,144,000 Capital expenditures 13,424,000 518,000 13,942,000 Net sales March 31, 2023 March 31, 2022 March 31, 2021 Total net sales for reportable segment $ 639,060,000 $ 610,823,000 $ 512,811,000 Other net sales 44,806,000 42,818,000 30,429,000 Elimination of intersegment net sales ( 792,000 ) ( 3,333,000 ) ( 2,458,000 ) Total consolidated net sales $ 683,074,000 $ 650,308,000 $ 540,782,000 Profit or loss March 31, 2023 March 31, 2022 March 31, 2021 Total operating income for reportable segment $ 44,855,000 $ 32,265,000 $ 48,450,000 Other operating loss ( 8,303,000 ) ( 3,544,000 ) ( 1,830,000 ) Elimination of intersegment operating (loss) income ( 106,000 ) ( 17,000 ) 13,000 Interest expense, net ( 39,555,000 ) ( 15,555,000 ) ( 15,770,000 ) Total consolidated (loss) income before income tax expense $ ( 3,109,000 ) $ 13,149,000 $ 30,863,000 Assets March 31, 2023 March 31, 2022 Total assets for reportable segment $ 1,032,739,000 $ 1,017,475,000 Other assets 49,778,000 47,488,000 Elimination of intersegment assets ( 53,952,000 ) ( 49,265,000 ) Total consolidated assets $ 1,028,565,000 $ 1,015,698,000 20. Share Repurchase Program 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 year ended March 31, 2023 the Company did no t repurchase any shares of its common stock. During the years ended March 31, 2022 and 2021, the Company repurchased 106,486 and 54,960 shares of its 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 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 March 31, 2023. The Company’s share repurchase program does not obligate it to acquire any specific number of shares and shares may be repurchased in privately negotiated and/or open market transactions. F-37 Table of Contents 21. Related Party Transactions Lease In December 2022, the Company entered into an operating lease for its 35,000 square foot manufacturing, warehouse, and office facility in Ontario, Canada, with a company co-owned by a member of management. The lease, which commenced January 1, 2023, has an initial term of one year with a base rent of approximately $ 27,000 per month and includes options to renew for up to four years . The rent expense recorded by the Company for the related party lease was $ 82,000 for the year ended March 31, 2023. Convertible Note and Election of New Director On March 31, 2023, the Company entered into the Note Purchase Agreement with Bison Capital Partners VI, L.P. and Bison Capital Partners VI-A, L.P., and Bison Capital Partners VI, L.P. as the Purchaser Representative, for the issuance and sale of the Convertible Notes. In connection with the issuance of the Convertible Notes and at the recommendation of the Nominating and Corporate Governance Committee of the Board and in connection with the bylaws of the Company, the Board appointed Douglas Trussler, a co-founder of Bison Capital in 2001, to the Board, effective immediately, to serve until the Company’s 2024 Annual Meeting of Stockholders and until his successor is duly elected and qualified. Mr. Trussler’s compensation will be consistent with the Company’s previously disclosed standard compensation practices for non-employee directors, which are described in the Company’s Definitive Proxy Statement, filed with the SEC on July 29, 2022. There are no other transactions between Mr. Trussler and the Company that would be reportable under Item 404(a) of Regulation S-K. 22. Employee Retention Credit The CARES Act provides an employee retention credit (“ERC”) that is a refundable tax credit against certain employer taxes. On December 27, 2020, Congress enacted the Taxpayer Certainty and Disaster Tax Relief Act of 2020, which amended and extended ERC availability under Section 2301 of the CARES Act. As a result, the Company was eligible to claim a refundable tax credit against the employer share of Social Security taxes equal to seventy percent ( 70 %) of the qualified wages that it paid to its employees between December 31, 2020 and June 30, 2021. Qualified wages are limited to $ 10,000 per employee per calendar quarter in 2021 for a maximum ERC per employee of $ 7,000 per calendar quarter in 2021. In the fourth quarter of the fiscal year ended March 31, 2022, the Company amended certain payroll tax filings and applied for a refund of $ 5,104,000 . As of March 31, 2023, the Company 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 $ 5,104,000 of ERCs were 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, the Company recorded a reduction in expenses of $ 2,034,000 in cost of goods sold, $ 1,377,000 in general and administrative, $ 968,000 in selling and marketing, and $ 725,000 in research and development, which is reflected in the accompanying consolidated statement of operations for the year ended March 31, 2023. In April 2023, the Company received full payment for the ERC receivable. The refund of employer taxes results in a decrease in deductions included in the Company’s US federal and certain state income tax returns for the years that it received the payroll tax credits. The Company is required to amend its US federal and state income tax returns for the years ended March 31, 2022 and 2021 and pay additional income tax for those years. The Company has estimated that this will result in approximately $ 1,250,000 of taxes payable, which is included in other current liabilities in the consolidated balance sheet at March 31, 2023 and income tax expense in the consolidated statements of operations for the year ended March 31, 2023. F-38 Table of Contents Schedule II — Valuation and Qualifying Accounts Accounts Receivable — Allowance for credit losses Charge to Balance at (recovery of) Balance at Years Ended beginning of bad debts Amounts end of March 31, Description year expense written off year 2023 Allowance for credit losses $ 375,000 $ 108,000 $ 144,000 $ 339,000 2022 Allowance for credit losses $ 348,000 $ 95,000 $ 68,000 $ 375,000 2021 Allowance for credit losses $ 4,252,000 $ ( 1,000 ) $ 3,903,000 $ 348,000 Accounts Receivable — Allowance for customer-payment discrepancies Balance at Charge to Balance at Years Ended beginning of discrepancies Amounts end of March 31, Description year expense Processed year 2023 Allowance for customer-payment discrepancies $ 1,375,000 $ 2,112,000 $ 1,853,000 $ 1,634,000 2022 Allowance for customer-payment discrepancies $ 752,000 $ 2,142,000 $ 1,519,000 $ 1,375,000 2021 Allowance for customer-payment discrepancies $ 1,040,000 $ 694,000 $ 982,000 $ 752,000 Inventory — Allowance for excess and obsolete inventory Provision for Balance at excess and Balance at Years Ended beginning of obsolete Amounts end of March 31, Description year inventory written off year 2023 A llowance for excess and obsolete inventory $ 13,520,000 $ 18,851,000 $ 15,935,000 $ 16,436,000 2022 Allowance for excess and obsolete inventory $ 13,246,000 $ 13,504,000 $ 13,230,000 $ 13,520,000 2021 Allowance for excess and obsolete inventory $ 13,208,000 $ 12,803,000 $ 12,765,000 $ 13,246,000 S-1