MOTORCAR PARTS OF AMERICA INC

Previous wording

The following discussion and analysis presents factors that Motorcar Parts of America, Inc. and its subsidiaries (“our,” “we” or “us”) believe are relevant to an assessment and understanding of our consolidated financial position and results of operations. This financial and business analysis should be read in conjunction with our March 31, 2023 audited consolidated financial statements included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on June 14, 2023.

Current wording

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.

Previous wording

This report may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to our future performance that involve risks and uncertainties. All statements other than statements of historical fact are forward-looking statements, including, but not limited to, statements about our strategic initiatives, operational plans and objectives, expectations for economic conditions and recovery and future business and financial performance, as well as statements regarding underlying assumptions related thereto. They include, among others, factors related to the timing and implementation of strategic initiatives, the highly competitive nature of our industry, demand for our products and services, complexities in our inventory and supply chain, challenges with transforming and growing our business. Except as required by law, we undertake no obligation to revise or update publicly any forward-looking statements for any reason. Therefore, you should not place undue reliance on those statements. Please refer to“Item 1A. Risk Factors” of our most recent Annual Report on Form 10-K filed with the SEC on June 14, 2023, as updated by our subsequent filings with the SEC, for a description of these and other risks and uncertainties that could cause actual results to differ materially from those projected or implied by the forward-looking statements.

Current wording

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.

Previous wording

With a scalable infrastructure and abundant growth opportunities, we are focused on growing our aftermarket business in the North American marketplace and growing our leadership position in the test solutions and diagnostic equipment market by providing innovative and intuitive solutions to our customers. Our investments in infrastructure and human resources during the past few years reflects the significant expansion of manufacturing capacity to support multiple product lines. These investments included (i) a 410,000 square foot distribution center, (ii) two buildings totaling 372,000 square feet for remanufacturing and core sorting of brake calipers, and (iii) the realignment of production at our original 312,000 square foot facility in Mexico.

Current wording

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 three months ended June 30, 2024, we reduced our headcount at our Torrance, California facility 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.

Previous wording

Net Sales. Our consolidated net sales for the three months ended December 31, 2023 were $171,862,000, which represents an increase of $20,043,000, or 13.2%, from the three months ended December 31, 2022 of $151,819,000. Our sales for the three months ended December 31, 2023 compared with the three months ended December 31, 2022 reflect strong demand across all product lines.

Current wording

Net Sales. Our consolidated net sales for the three months ended June 30, 2024 were $169,887,000, which represents an increase of $10,182,000, or 6.4%, from the three months ended June 30, 2023 of $159,705,000. Our sales for the three months ended June 30, 2024 compared with the three months ended June 30, 2023 reflect continued strong demand for rotating electrical and brake-related products.

Previous wording

Gross Profit. Our consolidated gross profit was $30,043,000, or 17.5% of consolidated net sales, for the three months ended December 31, 2023 compared with $20,993,000, or 13.8% of consolidated net sales, for the three months ended December 31, 2022. The increase in our gross margin for the three months ended December 31, 2023 reflects increased utilization of our facilities and the benefit of price increases that went into effect during prior periods.

Current wording

Gross Profit. Our consolidated gross profit was $29,174,000, or 17.2% of consolidated net sales, for the three months ended June 30, 2024 compared with $26,567,000, or 16.6% of consolidated net sales, for the three months ended June 30, 2023. The increase in our gross margin for the three months ended June 30, 2024 reflects (i) changes in product mix, (ii) increased utilization of our facilities, and (iii) the benefit of price increases that went into effect during the current and prior periods.

Previous wording

In addition, our gross margin for the three months ended December 31, 2023 compared with the three months ended December 31, 2022 was impacted by (i) additional expenses of $1,555,000 and $2,370,000, respectively, primarily due to certain costs for disruptions in the supply chain, (ii) amortization of core and finished goods premiums paid to customers related to new business of $2,838,000 and $3,075,000, respectively, and (iii) the non-cash quarterly revaluation of cores that are part of the finished goods on the customers’ shelves (which are included in contract assets) to the lower of cost or net realizable value, which resulted in a write-down of $1,607,000 and $863,000, respectively.

Current wording

In addition, our gross margin for the three months ended June 30, 2024 compared with the three months ended June 30, 2023 was impacted by (i) amortization of core and finished goods premiums paid to customers related to new business of $2,728,000 and $2,657,000, 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 $394,000 and $778,000, respectively.

Previous wording

Sales and Marketing. Our sales and marketing expenses for the three months ended December 31, 2023 were $5,931,000, which represents an increase of $297,000, or 5.3%, from the three months ended December 31, 2022 of $5,634,000. This increase was primarily due to increased employee-related expenses and higher commissions, which resulted from higher sales, partially offset by reduced expenses for trade shows during the three months ended December 31, 2023 compared with the three months ended December 31, 2022.

Current wording

Sales and Marketing. Our sales and marketing expenses were consistent at $5,449,000 for the three months ended June 30, 2024 compared with $5,419,000 for the three months ended June 30, 2023.

Previous wording

Research and Development. Our research and development expenses were consistent at $2,539,000 for the three months ended December 31, 2023 compared with $2,547,000 for the three months ended December 31, 2022.

Current wording

Research and Development. Our research and development expenses were consistent at $2,433,000 for the three months ended June 30, 2024 compared with $2,375,000 for the three months ended June 30, 2023.

Previous wording

Foreign Exchange Impact of Lease Liabilities and Forward Contracts. Our foreign exchange impact of lease liabilities and forward contracts for the nine months ended December 31, 2023 and 2022 were non-cash gains of $2,659,000 and $2,553,000, respectively. This change during the nine months ended December 31, 2023 compared with the nine months ended December 31, 2022 was primarily due to (i) the remeasurement of our foreign currency-denominated lease liabilities, which resulted in non-cash gains of $4,430,000 and $2,108,000, respectively, due to foreign currency exchange rate fluctuations and (ii) the forward foreign currency exchange contracts, which resulted in a non-cash loss of $1,771,000 compared with a non-cash gain of $445,000, respectively, due to the changes in their fair values.

Current wording

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 $11,078,000 compared with a non-cash gain of $4,270,000 for the three months ended June 30, 2024 and 2023, respectively. This change during the three months ended June 30, 2024 compared with the three months ended June 30, 2023 was primarily due to (i) the remeasurement of our foreign currency-denominated lease liabilities, which resulted in a non-cash loss of $5,709,000 compared with a non-cash gain of $3,770,000, respectively, due to foreign currency exchange rate fluctuations and (ii) the forward foreign currency exchange contracts, which resulted in a non-cash loss of $5,369,000 compared with a non-cash gain of $500,000, respectively, due to the changes in their fair values.

Previous wording

Interest Expense, net. Our interest expense for the three months ended December 31, 2023 was $18,297,000, which represents an increase of $6,826,000, or 59.5%, from interest expense for the three months ended December 31, 2022 of $11,471,000. This increase was primarily due to (i) increased utilization of and higher interest rates on our accounts receivable discount programs, which have variable interest rates and (ii) non-cash interest expense incurred on the Convertible Notes issued on March 31, 2023.

Current wording

Interest Expense, net. Our interest expense for the three months ended June 30, 2024 was $14,387,000, which represents an increase of $2,667,000, or 22.8%, from interest expense for the three months ended June 30, 2023 of $11,720,000. This increase was primarily due to increased collection of receivables utilizing accounts receivable discount programs on higher sales partially offset by lower average outstanding balances under our credit facility.

Previous wording

Change in Fair Value of Compound Net Derivative Liability. Our change in fair value of compound net derivative liability for the three months ended December 31, 2023 was a non-cash loss of $1,160,000 associated with the convertible notes issued on March 31, 2023.

Current wording

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 $2,580,000 compared with a non-cash loss of $140,000 for the three months ended June 30, 2024 and 2023, respectively.

Previous wording

Income Tax. We recorded an income tax expense of $37,281,000, or an effective tax rate of (375.3%), and an income tax benefit of $8,971,000, or an effective tax rate of 112.9%, for the three months ended December 31, 2023 and 2022, respectively. During the three months ended December 31, 2023, we recorded a discrete non-cash valuation allowance of $37,461,000 on our U.S. federal and various state deferred tax assets primarily due to recent losses. The change in the valuation allowance resulted from an updated forecast during the three months ended December 31, 2023. The effective tax rate for the three months ended December 31, 2023, was primarily impacted by (i) the establishment of a valuation allowance on deferred tax assets that we do not expect to be realized, (ii) foreign income taxed at rates that are different from the federal statutory rate, (iii) the portion of book expense related to convertible notes and derivatives that is not expected to be deductible for tax, and (iv) non-deductible executive compensation under Internal Revenue Code Section 162(m).

Current wording

Income Tax. We recorded an income tax benefit of $178,000, or an effective tax rate of 1.0%, and $9,000, or an effective tax rate of 0.6%, for the three months ended June 30, 2024 and 2023, respectively. The effective tax rate for the three months ended June 30, 2024, was primarily impacted by (i) the change in valuation allowance, (ii) foreign income taxed at rates that are different from the federal statutory rate, and (iii) specific jurisdictions that we do not expect to recognize the benefit of losses.

Previous wording

We had working capital (current assets minus current liabilities) of $154,815,000 and $154,886,000, a ratio of current assets to current liabilities of 1.4:1.0, at December 31, 2023 and March 31, 2023, respectively.

Current wording

We had working capital (current assets minus current liabilities) of $148,739,000 and $156,034,000, a ratio of current assets to current liabilities of 1.4:1.0, at June 30, 2024 and March 31, 2024, respectively.

Previous wording

Our primary source of liquidity was from cash generated from operations during the nine months ended December 31, 2023. We believe cash generated from operations, our cash and cash equivalents, use of accounts receivable discount programs, amounts available under our credit facility, and other sources are sufficient to satisfy our working capital needs, and lease and capital expenditure obligations over the next 12 months.

Current wording

Our primary source of liquidity was from the use of our receivable discount programs and credit facility during the three months ended June 30, 2024. In addition, we have access to our existing cash, as well as our available credit facility to meet short-term liquidity needs. We believe our cash and cash equivalents, use of receivable discount programs, amounts available under our credit facility, and other sources are sufficient to satisfy our expected future working capital needs and lease and capital expenditure obligations over the next 12 months.

Previous wording

Net cash provided by operating activities was $48,445,000 during the nine months ended December 31, 2023 compared with net cash used in operations of $21,428,000 during the nine months ended December 31, 2022. The significant changes in our operating activities reflect (i) the timing of supplier payments compared with the prior year, (ii) continued investments in inventory to support anticipated future demand for our products compared with inventory reduction initiatives in the prior year, and (iii) increased collections of our accounts receivable balances resulting from higher sales during the current year. We continue to manage our working capital to maximize our operating cash flow.

Current wording

Net cash used in operating activities was $20,841,000 and $20,470,000 during the three months ended June 30, 2024 and 2023, respectively. The significant changes in our operating activities reflect (i) increased collections of our accounts receivable balances resulting from higher sales during the current year compared with higher accounts receivable balances in the prior year as we managed the use of our customers’ accounts receivable discount programs and (ii) a reduction of accounts payable balances in the current year due the timing of supplier payments compared with the prior year. We continue to manage our working capital to maximize our operating cash flow.

Previous wording

Net cash used in investing activities was $420,000 and $3,855,000 during the nine months ended December 31, 2023 and 2022, respectively. The change in our investing activities primarily resulted from decreased capital expenditures.

Current wording

Net cash used in investing activities was $512,000 and $67,000 during the three months ended June 30, 2024 and 2023, respectively. The change in our investing activities primarily resulted from increased capital expenditures.

Previous wording

Net cash used in financing activities was $47,646,000 during the nine months ended December 31, 2023 compared with net cash provided by financing activities of $14,898,000 during the nine months ended December 31, 2022. The change in our financing activities primarily resulted from (i) the repayment of amounts outstanding under our credit facility of $43,325,000 and (ii) the payment of debt issuance costs incurred in connection with the amendments to our credit facility and convertible notes during the nine months ended December 31, 2023.

Current wording

Net cash provided by financing activities was $15,166,000 and $19,673,000 during the three months ended June 30, 2024 and 2023, respectively. The change in our financing activities primarily resulted from lower net borrowing of amounts under our credit facility.

Previous wording

We are party to a $268,620,000 senior secured financing (as amended from time to time, the “Credit Facility”) consisting of a $238,620,000 revolving loan facility (the “Revolving Facility”), subject to certain restrictions, and a $30,000,000 term loan facility (the “Term Loans”). Prior to the eighth amendment discussed below, the loans under the Credit Facility were scheduled to mature on May 28, 2026. The lenders have a security interest in substantially all of our assets.

Current wording

We are party to a $268,620,000 senior secured financing (as amended from time to time, the “Credit Facility”) consisting of a $238,620,000 revolving loan facility (the “Revolving Facility”), subject to certain restrictions, and a $30,000,000 term loan facility (the “Term Loans”). The 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. During the three months ended June 30, 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.

Previous wording

We had $115,000,000 and $145,200,000 outstanding under the Revolving Facility at December 31, 2023 and March 31, 2023, respectively. In addition, $6,370,000 was outstanding for letters of credit at December 31, 2023. At December 31, 2023, after certain contractual adjustments, $114,168,000 was available under the Revolving Facility. The interest rate on our Revolving Facility was 8.71% and 8.13% respectively, at December 31, 2023 and March 31, 2023, respectively.

Current wording

We had $143,834,000 and $128,000,000 outstanding under the Revolving Facility at June 30, 2024 and March 31, 2024, respectively. In addition, $6,370,000 was outstanding for letters of credit at June 30, 2024. At June 30, 2024, after certain contractual adjustments, $82,174,000 was available under the Revolving Facility. The interest rate on our Revolving Facility was 8.58% and 8.43%, at June 30, 2024 and March 31, 2024, respectively.

Previous wording

The Credit Facility, as amended, 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. At December 31, 2023, the undrawn availability was greater than the 22.5% threshold, therefore, the fixed charge coverage ratio financial covenant was not required to be tested. We were in compliance with these covenants as of December 31, 2023.

Current wording

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 period ended June 30, 2024, undrawn availability was greater than the 22.5% threshold, therefore, the fixed charge coverage ratio financial covenant was not required to be tested.

Previous wording

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. 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.

Current wording

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. During the three months ended June 30, 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 June 30, 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 June 30, 2024 and March 31, 2024, respectively.

Previous wording

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, 2023 and March 31, 2023. The fair value of the Conversion Option and the Company Redemption option using Level 3 inputs and the Monte Carlo simulation model was a liability of $13,500,000 and $10,400,000, and an asset of $3,380,000 and $1,970,000 at December 31, 2023 and March 31, 2023, respectively. During the three and nine months ended December 31, 2023, we recorded $1,160,000 and $1,690,000, respectively, as the change in fair value of the Compound Net Derivative Liability in the condensed consolidated statement of operations and condensed consolidated statement of cash flows.

Current wording

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 June 30, 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 $5,800,000 and $9,800,000, and an asset of $970,000 and $2,390,000 at June 30, 2024 and March 31, 2024, respectively. During the three months ended June 30, 2024 and 2023, we recorded a gain of $2,580,000 and a loss of $140,000, respectively, as the change in fair value of the Compound Net Derivative Liability in the condensed consolidated statement of operations and condensed consolidated statement of cash flows.

Previous wording

During the three months ended December 31, 2023, we launched a supplier finance program as part of our ongoing efforts to improve cash flow and liquidity. This program allows certain of our suppliers to sell their receivables due from us to a participating financial institution at the sole discretion of both the supplier and the financial institution. The program is administered by a third party. 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 on 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. Any amounts confirmed as outstanding supplier invoices are included within accounts payable on the condensed consolidated balance sheets. As of December 31, 2023, we had no outstanding supplier obligations confirmed under this program.

Current wording

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. As of June 30, 2024, $15,000,000 of commitments from participating financial institutions are available to suppliers under this program. 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 June 30, 2024, we had $12,773,000 of outstanding supplier obligations confirmed under this program, included in accounts payable in the condensed consolidated balance sheet.

Previous wording

Our total capital expenditures, including finance leases and non-cash capital expenditures were $559,000 and $3,632,000 for the nine months ended December 31, 2023 and 2022, respectively. These capital expenditures primarily include the purchase of equipment for our operations. We expect to incur approximately $1,500,000 of capital expenditures during fiscal 2024 to support our operations. We have used and expect to continue using our working capital and additional capital lease obligations to finance these capital expenditures.

Current wording

Our total capital expenditures were $493,000 and $64,000 for three months ended June 30, 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 $7,000,000 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.

Previous wording

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. The rent expense recorded for the related party lease was $81,000 and $243,000 for the three and nine months ended December 31, 2023.

Current wording

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. The rent expense recorded for the related party lease was $81,000 for the three months ended June 30, 2024 and 2023.

Previous wording

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 in 2001, to the Board. Mr. Trussler’s compensation will be 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 28, 2023.

Current wording

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 will be 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.

Previous wording

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.

Current wording

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.

Previous wording

There have been no material changes to, except as noted below, our critical accounting policies and estimates that are presented in our Annual Report on Form 10-K for the year ended March 31, 2023, which was filed on June 14, 2023.

Current wording

There have been no material changes to, except as noted below, 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.