MOTORCAR PARTS OF AMERICA INC 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis presents factors that Motorcar Parts of America, Inc. and its subsidiaries (“our,” “we” or “us”) believe are relevant to an assessment and understanding of our consolidated financial position and results of operations. This financial and business analysis should be read in conjunction with our March 31, 2024 audited consolidated financial statements included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on June 11, 2024, and the 10-K/A for the fiscal year ended March 31, 2024 as filed with the SEC on June 28, 2024. Disclosure Regarding Private Securities Litigation Reform Act of 1995 This report may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to our future performance that involve risks and uncertainties. All statements other than statements of historical fact are forward-looking statements, including, but not limited to, statements about our strategic initiatives, operational plans and objectives, expectations for economic conditions and recovery and future business and financial performance, as well as statements regarding underlying assumptions related thereto. They include, among others, factors related to the timing and implementation of strategic initiatives, the highly competitive nature of our industry, demand for our products and services, complexities in our inventory and supply chain, challenges with transforming and growing our business. Except as required by law, we undertake no obligation to revise or update publicly any forward-looking statements for any reason. Therefore, you should not place undue reliance on those statements. Please refer to “Item 1A. Risk Factors” of our most recent Annual Report on Form 10-K filed with the SEC on June 11, 2024, and the 10-K/A for the fiscal year ended March 31, 2024 as filed with the SEC on June 28, 2024, as updated by our subsequent filings with the SEC, for a description of these and other risks and uncertainties that could cause actual results to differ materially from those projected or implied by the forward-looking statements. Management Overview With a scalable infrastructure and abundant growth opportunities, we are focused on growing our aftermarket business in the North American marketplace and growing our leadership position in the test solutions and diagnostic equipment market by providing innovative and intuitive solutions to our customers. Our investments in global infrastructure and human resources during the past few years reflects the significant expansion of manufacturing capacity to support multiple product lines. These investments included (i) a 410,000 square foot distribution center, (ii) two buildings totaling 372,000 square feet for remanufacturing and core sorting of brake calipers, and (iii) the realignment of production at our original 312,000 square foot facility in Mexico. In addition, during the nine months ended December 31, 2024, we ceased manufacturing at our Torrance, California facility, reduced our headcount, and incurred certain transition expenses in connection with our on-going strategy to utilize our global footprint to enhance operating efficiencies and expect to realize future benefit from these cost-saving measures. Segment Reporting Our three operating segments are as follows: ● Hard Parts , which includes (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 , which includes (i) applications for combustion engine vehicles, including bench-top testers for alternators and starters, (ii) equipment for the pre- and post-production of electric vehicles, and (iii) software emulation of power system applications for the electrification of all forms of transportation (including automobiles, trucks, the emerging electrification of systems within the aerospace industry, and electric vehicle charging stations), and ● Heavy Duty , which includes non-discretionary automotive aftermarket replacement hard parts for heavy-duty truck, industrial, marine, and agricultural applications. 26 Table of Contents Our Hard Parts operating segment meets the criteria of a reportable segment. The Test Solutions and Diagnostic Equipment and Heavy Duty segments are not material, are not required to be separately reported, and are included within the “all other” category. See Note 18 of the notes to condensed consolidated financial statements for more information. Results of Operations for the Three Months Ended December 31, 2024 and 2023 The following discussion and analysis should be read together with the financial statements and notes thereto appearing elsewhere herein. The following summarizes certain key consolidated operating data: Three Months Ended December 31, 2024 2023 Cash flow provided by operations $ 34,357,000 $ 53,615,000 Finished goods turnover (annualized) (1) 3.7 3.6 (1) Annualized finished goods turnover for the fiscal quarter is calculated by multiplying cost of goods sold for the quarter by 4 and dividing the result by the average between beginning and ending non-core finished goods inventory values for the fiscal quarter. We believe this provides a useful measure of our ability to turn our inventory into revenues. Net Sales and Gross Profit The following summarizes net sales and gross profit: Three Months Ended December 31, 2024 2023 Net sales $ 186,176,000 $ 171,862,000 Cost of goods sold 141,294,000 141,819,000 Gross profit 44,882,000 30,043,000 Gross margin 24.1 % 17.5 % Net Sales . Our consolidated net sales for the three months ended December 31, 2024 were $186,176,000, which represents an increase of $14,314,000, or 8.3%, from the three months ended December 31, 2023 of $171,862,000. Our sales for the three months ended December 31, 2024 compared with the three months ended December 31, 2023 reflect continued strong demand for rotating electrical and brake-related products. Gross Profit. Our consolidated gross profit was $44,882,000, or 24.1% of consolidated net sales, for the three months ended December 31, 2024 compared with $30,043,000, or 17.5% of consolidated net sales, for the three months ended December 31, 2023. The increase in our gross margin for the three months ended December 31, 2024 reflects the benefit of our on-going strategy to utilize our global footprint to enhance operating efficiencies and our cost-saving initiatives . We expect to continue to realize benefits from these initiatives. In addition, our gross margin for the three months ended December 31, 2024 compared with the three months ended December 31, 2023 was impacted by (i) amortization of core and finished goods premiums paid to customers related to new business of $2,664,000 and $2,838,000, respectively and (ii) the non-cash quarterly revaluation of cores that are part of the finished goods on the customers’ shelves (which are included in contract assets) to the lower of cost or net realizable value, which resulted in a write-down of $758,000 and $1,607,000, respectively. 27 Table of Contents Operating Expenses The following summarizes our consolidated operating expenses: Three Months Ended December 31, 2024 2023 General and administrative $ 16,212,000 $ 15,198,000 Sales and marketing 5,621,000 5,931,000 Research and development 3,008,000 2,539,000 Foreign exchange impact of lease liabilities and forward contracts 2,460,000 (3,149,000 ) Percent of net sales General and administrative 8.7 % 8.8 % Sales and marketing 3.0 % 3.5 % Research and development 1.6 % 1.5 % Foreign exchange impact of lease liabilities and forward contracts 1.3 % (1.8 )% General and Administrative. Our general and administrative expenses for the three months ended December 31, 2024 were $16,212,000, which represents an increase of $1,014,000, or 6.7%, from the three months ended December 31, 2023 of $15,198,000. This increase was primarily due to a loss of $1,272,000 during the three months ended December 31, 2024 compared with a gain of $528,000 during the three months ended December 31, 2023 resulting from foreign currency exchange rates partially offset by decreased employee-related expenses. Sales and Marketing . Our sales and marketing expenses for the three months ended December 31, 2024 were $5,621,000, which represents a decrease of $310,000, or 5.2%, from the three months ended December 31, 2023 of $5,931,000. This decrease was due to lower trade shows and commissions expense. Research and Development . Our research and development expenses for the three months ended December 31, 2024 were $3,008,000, which represents an increase of $469,000, or 18.5%, from the three months ended December 31, 2023 of $2,539,000. This increase was primarily due to increased headcount and outside consulting services. Foreign Exchange Impact of Lease Liabilities and Forward Contracts . Our foreign exchange impact of lease liabilities and forward contracts were a non-cash loss of $2,460,000 compared with a non-cash gain of $3,149,000 for the three months ended December 31, 2024 and 2023, respectively. This change during the three months ended December 31, 2024 compared with the three months ended December 31, 2023 was primarily due to (i) the remeasurement of our foreign currency-denominated lease liabilities, which resulted in a non-cash loss of $1,875,000 compared with a non-cash gain of $2,608,000, respectively, due to foreign currency exchange rate fluctuations and (ii) the forward foreign currency exchange contracts, which resulted in a non-cash loss of $585,000 compared with a non-cash gain of $541,000, respectively, due to the changes in their fair values. Operating Income Consolidated Operating Income . Our consolidated operating income for the three months ended December 31, 2024 was $17,581,000 compared with $9,524,000 for the three months ended December 31, 2023. This increase was primarily due increased gross profit partially offset by our foreign exchange impact of lease liabilities and forward contracts, which were a non-cash loss of $2,460,000 compared with a non-cash gain of $3,149,000 for the three months ended December 31, 2024 and 2023, respectively and other items as discussed above. Interest Expense Interest Expense, net. Our interest expense for the three months ended December 31, 2024 was $14,435,000, which represents a decrease of $3,862,000, or 21.1%, from interest expense for the three months ended December 31, 2023 of $18,297,000. This decrease was primarily due to (i) decreased utilization of accounts receivable discount programs and lower discount rates on those programs and (ii) lower average outstanding balances under our credit facility and lower interest rates. 28 Table of Contents Change in Fair Value of Compound Net Derivative Liability Change in Fair Value of Compound Net Derivative Liability. Our change in fair value of compound net derivative liability associated with the convertible notes issued on March 31, 2023 was a non-cash gain of $260,000 compared with a non-cash loss of $1,160,000 for the three months ended December 31, 2024 and 2023, respectively. Provision for Income Taxes Income Tax . We recorded an income tax expense of $1,115,000, or an effective tax rate of 32.7%, and $37,281,000 or an effective tax rate of (375.3)%, for the three months ended December 31, 2024 and 2023, respectively. The effective tax rate for the three months ended December 31, 2024, was primarily impacted by (i) the change in valuation allowance, (ii) specific jurisdictions that we do not expect to recognize the benefit of losses, and (iii) foreign income taxed at rates that are different from the federal statutory rate. Our effective tax rate for the three months ended December 31, 2023 was primarily impacted by the establishment of a valuation allowance on deferred tax assets that were not expected to be realized. Results of Operations for the Nine Months Ended December 31, 2024 and 2023 The following discussion and analysis should be read together with the financial statements and notes thereto appearing elsewhere herein. The following summarizes certain key consolidated operating data: Nine Months Ended December 31, 2024 2023 Cash flows provided by operations $ 36,368,000 $ 48,445,000 Finished goods turnover (annualized) (1) 3.8 3.7 (1) Annualized finished goods turnover for the fiscal period is calculated by multiplying cost of goods sold for the fiscal period by 1.33 and dividing the result by the average between beginning and ending non-core finished goods inventory values for the fiscal period. We believe this provides a useful measure of our ability to turn our inventory into revenues. Net Sales and Gross Profit The following summarizes net sales and gross profit: Nine Months Ended December 31, 2024 2023 Net sales $ 564,249,000 $ 528,206,000 Cost of goods sold 448,916,000 430,448,000 Gross profit 115,333,000 97,758,000 Gross margin 20.4 % 18.5 % Net Sales . Our consolidated net sales for the nine months ended December 31, 2024 were $564,249,000, which represents an increase of $36,043,000, or 6.8%, from the nine months ended December 31, 2023 of $528,206,000. Our sales for the nine months ended December 31, 2024 compared with the nine months ended December 31, 2023 reflect continued strong demand for rotating electrical and brake-related products. In addition, we have experienced strong demand for our test solutions and diagnostic equipment. 29 Table of Contents Gross Profit. Our consolidated gross profit was $115,333,000, or 20.4% of consolidated net sales, for the nine months ended December 31, 2024 compared with $97,758,000, or 18.5% of consolidated net sales, for the nine months ended December 31, 2023. The increase in our gross margin for the nine months ended December 31, 2024 reflects the benefit of our on-going strategy to utilize our global footprint to enhance operating efficiencies and our cost-saving initiatives. These increases were partially offset by (i) $3,960,000 of certain one-time expenses for onboarding new business and (ii) $1,298,000 of transition expenses in connection with our on-going strategy to utilize our global footprint to enhance operating efficiencies. We expect to continue to realize benefits from these initiatives. In addition, our gross margin for the nine months ended December 31, 2024 compared with the nine months ended December 31, 2023 was impacted by (i) amortization of core and finished goods premiums paid to customers related to new business of $8,013,000 and $8,202,000, respectively and (ii) the non-cash quarterly revaluation of cores that are part of the finished goods on the customers’ shelves (which are included in contract assets) to the lower of cost or net realizable value, which resulted in a write-down of $2,316,000 and $4,380,000, respectively. Operating Expenses The following summarizes our consolidated operating expenses: Nine Months Ended December 31, 2024 2023 General and administrative $ 47,934,000 $ 42,125,000 Sales and marketing 16,904,000 17,038,000 Research and development 7,884,000 7,352,000 Foreign exchange impact of lease liabilities and forward contracts 18,966,000 (2,659,000 ) Percent of net sales General and administrative 8.5 % 8.0 % Sales and marketing 3.0 % 3.2 % Research and development 1.4 % 1.4 % Foreign exchange impact of lease liabilities and forward contracts 3.4 % (0.5 )% General and Administrative. Our general and administrative expenses for the nine months ended December 31, 2024 were $47,934,000, which represents an increase of $5,809,000, or 13.8%, from the nine months ended December 31, 2023 of $42,125,000. This increase was primarily due to (i) a loss of $2,998,000 during the nine months ended December 31, 2024 compared with a gain of $683,000 during the nine months ended December 31, 2023 resulting from foreign currency exchange rates and (ii) $2,834,000 of increased severance during the nine months ended December 31, 2024 due to headcount reductions in connection with our strategy to utilize our global footprint to enhance operating efficiencies. These increases were partially offset by $1,259,000 of decreased share-based compensation expense. Sales and Marketing . Our sales and marketing expenses were consistent at $16,904,000 for the nine months ended December 31, 2024 compared with $17,038,000 for the nine months ended December 31, 2023. Research and Development . Our research and development expenses for the nine months ended December 31, 2024 were $7,884,000, which represents an increase of $532,000, or 7.2%, from the nine months ended December 31, 2023 of $7,352,000. This increase was primarily due to increased headcount partially offset by decreased supplies. 30 Table of Contents Foreign Exchange Impact of Lease Liabilities and Forward Contracts . Our foreign exchange impact of lease liabilities and forward contracts were a non-cash loss of $18,966,000 compared with a non-cash gain of $2,659,000 for the nine months ended December 31, 2024 and 2023, respectively. This change during the nine months ended December 31, 2024 compared with the nine months ended December 31, 2023 was primarily due to (i) the remeasurement of our foreign currency-denominated lease liabilities, which resulted in a non-cash loss of $11,562,000 compared with a non-cash gain of $4,430,000, respectively, due to foreign currency exchange rate fluctuations and (ii) the forward foreign currency exchange contracts, which resulted in non-cash losses of $7,404,000 and $1,771,000, respectively, due to the changes in their fair values. Operating Income Consolidated Operating Income . Our consolidated operating income for the nine months ended December 31, 2024 was $23,645,000 compared with $33,902,000 for the nine months ended December 31, 2023. This decrease was primarily due our foreign exchange impact of lease liabilities and forward contracts, which were a non-cash loss of $18,966,000 compared with a non-cash gain of $2,659,000 for the nine months ended December 31, 2024 and 2023, respectively partially offset by higher gross profit and other items as discussed above. Interest Expense Interest Expense, net. Our interest expense for the nine months ended December 31, 2024 was $43,004,000, which represents a decrease of $2,396,000, or 5.3%, from interest expense for the nine months ended December 31, 2023 of $45,400,000. This decrease was primarily due to lower average outstanding balances under our credit facility and lower interest rates. Change in Fair Value of Compound Net Derivative Liability Change in Fair Value of Compound Net Derivative Liability. Our change in fair value of compound net derivative liability associated with the convertible notes issued on March 31, 2023 was a non-cash gain of $2,460,000 compared with a non-cash loss of $1,690,000 for the nine months ended December 31, 2024 and 2023, respectively. Loss on Extinguishment of Debt Loss on Extinguishment of Debt. Our loss on extinguishment of debt was $168,000 in connection with the repayment of the remaining outstanding balance of our term loans during the nine months ended December 31, 2023. Provision for Income Taxes Income Tax . We recorded income tax expense of $1,849,000, or an effective tax rate of (10.9)%, and $37,226,000, or an effective tax rate of (278.7)%, for the nine months ended December 31, 2024 and 2023, respectively. The effective tax rate for the nine months ended December 31, 2024, was primarily impacted by (i) foreign income taxed at rates that are different from the federal statutory rate, (ii) the change in valuation allowance, and (iii) specific jurisdictions that we do not expect to recognize the benefit of losses. Our effective tax rate for the nine months ended December 31, 2023 was primarily impacted by the establishment of a valuation allowance on deferred tax assets that were not expected to be realized. Liquidity and Capital Resources Overview We had working capital (current assets minus current liabilities) of $155,693,000 and $156,034,000, a ratio of current assets to current liabilities of 1.4:1.0, at December 31, 2024 and March 31, 2024, respectively. In June 2024, we enrolled in a feature with our lenders, under which we sweep our cash collections to pay down our revolving facility and borrow on-demand to fund payments. This feature is expected to reduce interest expense on borrowings under the credit facility. Our primary source of liquidity was from cash generated from operations, the use of our receivable discount programs, and credit facility during the nine months ended December 31, 2024. We believe our cash and cash equivalents, use of receivable discount programs, amounts available under our credit facility, and other sources are sufficient to satisfy our expected future liquidity needs, including lease and capital expenditure obligations over the next 12 months. 31 Table of Contents Share Repurchase Program In August 2018, our board of directors approved an increase in our share repurchase program from $20,000,000 to $37,000,000 of our common stock. During the three and nine months ended December 31, 2024, we repurchased 268,130 shares of our common stock for $2,096,000. We did not repurchase any shares of our common stock during the three and nine months ended December 31, 2023. As of December 31, 2024, $20,841,000 has been utilized and $16,159,000 remains available to repurchase shares under the authorized share repurchase program, subject to the limit in our Credit Facility. We retired the 1,105,137 shares repurchased under this program through December 31, 2024. Our share repurchase program does not obligate us to acquire any specific number of shares and shares may be repurchased in privately negotiated and/or open market transactions. Cash Flows The following summarizes cash flows as reflected in the condensed consolidated statements of cash flows: Nine Months Ended December 31, 2024 2023 Cash flows provided by (used in): Operating activities $ 36,368,000 $ 48,445,000 Investing activities (1,614,000 ) (420,000 ) Financing activities (36,796,000 ) (47,646,000 ) Effect of exchange rates on cash and cash equivalents (1,122,000 ) 180,000 Net (decrease) increase in cash and cash equivalents $ (3,164,000 ) $ 559,000 Additional selected cash flow data: Depreciation and amortization $ 7,862,000 $ 8,844,000 Capital expenditures 1,716,000 462,000 Net cash provided by operating activities was $36,368,000 and $48,445,000 during the nine months ended December 31, 2024 and 2023, respectively. The changes in our operating activities were primarily impacted by (i) the pay down of our accounts payable balances, (ii) a less significant decrease in accounts receivable balances compared with the prior year, and (iii) an increase in cores that are part of the finished goods on the customers’ shelves (which are included in contract assets) due to higher sales compared with the prior year. These decreases were partially offset by inventory reduction initiatives in the current year compared with the investment in inventory in the prior year and by increased operating results (net income plus the net add-back for non-cash transactions in earnings). We continue to manage our working capital to maximize our operating cash flow. Net cash used in investing activities was $1,614,000 and $420,000 during the nine months ended December 31, 2024 and 2023, respectively. The change in our investing activities primarily resulted from increased capital expenditures. Net cash used in financing activities was $36,796,000 and $47,646,000 during the nine months ended December 31, 2024 and 2023, respectively. The change in our financing activities primarily resulted from the repayment of our term loans in the prior year. 32 Table of Contents Capital Resources Credit Facility We have $268,620,000 in senior secured financing (as amended from time to time, the “Credit Facility”) consisting of a $238,620,000 revolving loan facility (the “Revolving Facility”), subject to certain restrictions, and a $30,000,000 term loan facility (the “Term Loans”). The Term Loans were repaid during the year ended March 31, 2024. The Credit Facility matures on December 12, 2028. The lenders have a security interest in substantially all of our assets. In June 2024, we enrolled in a feature with our lenders, under which we sweep our cash collections to pay down our revolving facility and borrow on-demand to fund payments. This feature is expected to reduce interest expense on borrowings under the Credit Facility. We had $94,802,000 and $128,000,000 outstanding under the Revolving Facility at December 31, 2024 and March 31, 2024, respectively. In addition, $7,047,000 was outstanding for letters of credit at December 31, 2024. At December 31, 2024, after certain contractual adjustments, $127,962,000 was available under the Revolving Facility. The interest rate on our Revolving Facility was 7.66% and 8.43%, at December 31, 2024 and March 31, 2024, respectively. The Credit Facility requires us to maintain a minimum fixed charge coverage ratio if undrawn availability is less than 22.5% of the aggregate revolving commitments and a specified minimum undrawn availability. During the nine months ended December 31, 2024, undrawn availability was greater than the 22.5% threshold, therefore, the fixed charge coverage ratio financial covenant was not required to be tested. Convertible Notes On March 31, 2023, we entered into a note purchase agreement, as amended, (the “Note Purchase Agreement”) with Bison Capital Partners VI, L.P. and Bison Capital Partners VI-A, L.P. (collectively, the “Purchasers”) and Bison Capital Partners VI, L.P., as the purchaser representative (the “Purchaser Representative”) for the issuance and sale of $32,000,000 in aggregate principal amount of convertible notes due in 2029 (the “Convertible Notes”), which was used for general corporate purposes. The Convertible Notes bear interest at a rate of 10.0% per annum, compounded annually, and payable (i) in-kind or (ii) in cash, annually in arrears on April 1 of each year, commencing on April 1, 2024. In April 2024, non-cash accrued interest on the Convertible Notes of $3,209,000 was paid in-kind and is included in the principal amount of Convertible Notes at December 31, 2024. The Convertible Notes have an initial conversion price of approximately $15.00 per share of common stock. (“Conversion Option”). Unless and until we deliver a redemption notice, the Purchasers of the Convertible Notes may convert their Convertible Notes at any time at their option. Upon conversion, the Convertible Notes will be settled in shares of our common stock. Except in the case of the occurrence of a fundamental transaction, as defined in the form of convertible promissory note, we may not redeem the Convertible Notes prior to March 31, 2026. After March 31, 2026, we may redeem all or part of the Convertible Notes for a cash purchase (the “Company Redemption”) price. The effective interest rate was 18.3% as of December 31, 2024 and March 31, 2024, respectively. In connection with the Note Purchase Agreement, we entered into common stock warrants (the “Warrants”) with the Purchasers, which mature on March 30, 2029. The fair value of the Warrants, using Level 3 inputs and the Monte Carlo simulation model, was zero at December 31, 2024 and March 31, 2024. The Company Redemption option has been combined with the Conversion Option as a compound net derivative liability (the “Compound Net Derivative Liability”). The Compound Net Derivative Liability has been recorded within convertible note, related party in the condensed consolidated balance sheets at December 31, 2024 and March 31, 2024. The fair value of the Conversion Option and the Company Redemption option using Level 3 inputs and the Monte Carlo simulation model was a liability of $5,600,000 and $9,800,000, and an asset of $650,000 and $2,390,000 at December 31, 2024 and March 31, 2024, respectively. During the three months ended December 31, 2024 and 2023, we recorded a gain of $260,000 and a loss of $1,160,000, respectively, as the change in fair value of the Compound Net Derivative Liability in the condensed consolidated statements of operations. During the nine months ended December 31, 2024 and 2023, we recorded a gain of $2,460,000 and a loss of $1,690,000, respectively, as the change in fair value of the Compound Net Derivative Liability in the condensed consolidated statements of operations and condensed consolidated statements of cash flows. The Convertible Notes also contain additional features, such as, default interest and options related to a fundamental transaction, which were not separately accounted for as the value of such features were not material at December 31, 2024 and March 31, 2024. 33 Table of Contents Accounts Receivable Discount Programs We use accounts receivable discount programs offered by certain customers and their respective banks. Under these programs, we have options to sell those customers’ receivables to those banks at a discount to be agreed upon at the time the receivables are sold. These discount arrangements allow us to accelerate receipt of payment on customers’ receivables. While these arrangements have reduced our working capital needs, there can be no assurance that these programs will continue in the future. Interest expense resulting from these programs would increase if interest rates rise, if utilization of these discounting arrangements expands, if customers extend their payment to us, or if the discount period is extended to reflect more favorable payment terms to customers. The following is a summary of the accounts receivable discount programs: Nine Months Ended December 31, 2024 2023 Receivables discounted $ 488,505,000 $ 465,073,000 Weighted average number of days collection was accelerated 342 334 Annualized weighted average discount rate 6.3 % 6.8 % Amount of discount recognized as interest expense $ 29,202,000 $ 29,395,000 Supplier Finance Programs We utilize a supplier finance program, which allows certain of our suppliers to sell their receivables due from us to participating financial institutions at the sole discretion of both the supplier and the financial institutions. The program is administered by a third party. Commitments from participating financial institutions that are available to suppliers under this program increased to $27,000,000 from $15,000,000 during the three months ended December 31, 2024. We have no economic interest in the sale of these receivables and no direct relationship with the financial institution. Payments to the third-party administrator are based on services rendered and are not related to the volume or number of financing agreements between suppliers, financial institution, and the third-party administrator. We are not a party to agreements negotiated between participating suppliers and the financial institution. Our obligations to our suppliers, including amounts due and payment terms, are not affected by a supplier's decision to participate in this program. We do not provide guarantees and there are no assets pledged to the financial institution or the third-party administrator for the committed payment in connection with this program. At December 31, 2024, we had $31,809,000 of outstanding supplier obligations confirmed as valid under this program, included in accounts payable in the condensed consolidated balance sheet. Capital Expenditures and Commitments Capital Expenditures Our total capital expenditures were $2,531,000 and $559,000 for nine months ended December 31, 2024 and 2023, respectively. These capital expenditures include (i) cash paid for the purchase of plant and equipment plant, (ii) equipment acquired under finance leases, and (iii) non-cash capital expenditures. Capital expenditures for fiscal 2025 primarily include the purchase of equipment for our current operations. We expect to incur approximately $5,000,000 of capital expenditures primarily to support our global growth initiatives and current operations during fiscal 2025. We have used and expect to continue using our working capital and additional capital lease obligations to finance these capital expenditures. Related Party Transactions Lease In December 2022, we entered into an operating lease for our 35,000 square foot manufacturing, warehouse, and office facility in Ontario, Canada, with a company co-owned by a member of management. The lease, which commenced January 1, 2023, had an initial term of one year with a base rent of approximately $27,000 per month and included options to renew for up to four years. In November 2023, we exercised one of these options to renew for an additional one-year period. In February 2025, we exercised a second extension term for an additional three-year period with a base rent of approximately $30,000 per month, which took effect on January 1, 2025. The rent expense recorded for the related party lease was $81,000 and $243,000 for the three and nine months ended December 31, 2024 and 2023. 34 Table of Contents Convertible Note and Election of Director In connection with the issuance and sale of our Convertible Notes on March 31, 2023, the Board appointed Douglas Trussler, a co-founder of Bison Capital, to the Board. Mr. Trussler’s compensation is consistent with our previously disclosed standard compensation practices for non-employee directors, which are described in our Definitive Proxy Statement, filed with the SEC on July 26, 2024. Litigation We are subject to various lawsuits and claims. In addition, government agencies and self-regulatory organizations have the ability to conduct periodic examinations of and administrative proceedings regarding our business, and our compliance with law, code, and regulations related to all matters including but not limited to environmental, information security, taxes, levies, tariffs and such. We have an immaterial amount accrued related to these exposures to various lawsuits and claims. Critical Accounting Policies There have been no material changes to our critical accounting policies and estimates that are presented in our Annual Report on Form 10-K for the year ended March 31, 2024, which was filed on June 11, 2024, and the 10-K/A for the fiscal year ended March 31, 2024 as filed with the SEC on June 28, 2024. Accounting Pronouncements Not Yet Adopted Disclosure Improvements In October 2023, the FASB issued ASU 2023-06, Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative . This standard was issued in response to the SEC’s disclosure update and simplification initiative, which affects a variety of topics within the Accounting Standards Codification. The amendments apply to all reporting entities within the scope of the affected Topics unless otherwise indicated. The effective date for each amendment will be the date on which the SEC’s removal of that related disclosure from Regulation S-X or Regulation S-K becomes effective, with early adoption prohibited. We are currently evaluating the impact this guidance will have on our financial statement disclosures. Reportable Segment Disclosures In November 2023, the FASB issued ASU 2023-07, Improvements to Reportable Segment Disclosures (Topic 280) . This standard requires us to disclose significant segment expenses that are regularly provided to the CODM and are included within each reported measure of segment operating results. The standard also requires us to disclose the total amount of any other items included in segment operating results, which were not deemed to be significant expenses for separate disclosure, along with a qualitative description of the composition of these other items. In addition, the standard also requires disclosure of the CODM’s title and position, as well as detail on how the CODM uses the reported measure of segment operating results to evaluate segment performance and allocate resources. The standard also aligns interim segment reporting disclosure requirements with annual segment reporting disclosure requirements. This guidance is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. We are currently evaluating the impact this guidance will have on our financial statement disclosures. 35 Table of Contents Improvements to Income Tax Disclosures In December 2023, the FASB issued ASU 2023-09, Improvements to Income Tax Disclosures (Topic 740) . This standard requires us to provide further disaggregated income tax disclosures for specific categories on the effective tax rate reconciliation, as well as additional information about federal, state/local and foreign income taxes. The standard also requires us to annually disclose our income taxes paid (net of refunds received), disaggregated by jurisdiction. This guidance is effective for fiscal years beginning after December 15, 2024, with early adoption permitted. The standard is to be applied prospective basis, although optional retrospective application is permitted. We are currently evaluating the impact this guidance will have on our financial statement disclosures. Disaggregation of Income Statement Expenses In November 2024, the FASB issued ASU 2024-03, Disaggregation of Income Statement Expenses (“DISE”) (Subtopic 220-40) . This standard requires us to disclose, in the footnotes at each interim and annual reporting period, information about expenses by the nature of the expense in addition to certain disclosures about selling expenses. Entities are required to include the following relevant expense captions: (i) purchase of inventory, (ii) employee compensation, (iii) depreciation, (iv) intangible asset amortization, and (v) depreciation, depletion and amortization recognized as part of oil and gas producing activities. This guidance is effective for annual periods beginning after December 15, 2026 and interim periods beginning after December 15, 2027 on a prospective basis with the option for retrospective application. Early adoption is permitted. We are currently evaluating the impact this guidance will have on our financial statement disclosures. Debt with Conversion and Other Options In November 2024, the FASB issued ASU 2024-04, Debt with Conversion and Other Options (Subtopic 470-20): Induced Conversions of Convertible Debt Instruments , which seeks to clarify the requirements for determining whether certain settlements of convertible debt instruments should be accounted for as an induced conversion. This guidance is effective for annual periods beginning after December 15, 2025, including interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the impact this guidance will have on our consolidated financial statements and disclosures.