MOTORCAR PARTS OF AMERICA INC

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 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.

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 six months ended September 30, 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.

Previous 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.

Current wording

Net Sales. Our consolidated net sales for the three months ended September 30, 2024 were $208,186,000, which represents an increase of $11,547,000, or 5.9%, from the three months ended September 30, 2023 of $196,639,000. Our sales for the three months ended September 30, 2024 compared with the three months September 30, 2023 reflect continued strong demand for rotating electrical and brake-related products.

Previous 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.

Current wording

Gross Profit. Our consolidated gross profit was $41,277,000, or 19.8% of consolidated net sales, for the three months ended September 30, 2024 compared with $41,148,000, or 20.9% of consolidated net sales, for the three months ended September 30, 2023. The decrease in our gross margin for the three months ended September 30, 2024 reflects (i) $2,686,000 of certain one-time expenses for onboarding new business and (ii) $1,298,000 of transition expenses in connection with our on-going strategyto utilize our global footprint to enhance operating efficiencies. We expect to realize future benefit from this new business and cost-saving initiatives.

Previous 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.

Current wording

In addition, our gross margin for the three months ended September 30, 2024 compared with the three months ended September 30, 2023 was impacted by (i) amortization of core and finished goods premiums paid to customers related to new business of $2,621,000 and $2,707,000, 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 $1,164,000 and $1,995,000, respectively.

Previous 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.

Current wording

Sales and Marketing. Our sales and marketing expenses were consistent at $5,834,000 for the three months ended September 30, 2024 compared with $5,688,000 for the three months ended September 30, 2023.

Previous 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.

Current wording

Research and Development. Our research and development expenses were consistent at $2,443,000 for the three months ended September 30, 2024 compared with $2,438,000 for the three months ended September 30, 2023.

Previous wording

Consolidated Operating (Loss) Income. Our consolidated operating loss for the three months ended June 30, 2024 was $6,456,000 compared with consolidated operating income of $10,441,000 for the three months ended June 30, 2023. This decrease was primarily due our foreign exchange impact of lease liabilities and forward contracts and other items as discussed above.

Current wording

Consolidated Operating Income. Our consolidated operating income for the three months ended September 30, 2024 was $12,520,000 compared with $13,937,000 for the three months ended September 30, 2023. This decrease was primarily due our foreign exchange impact of lease liabilities and forward contracts and other items as discussed above.

Previous 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.

Current wording

Income Tax. We recorded an income tax expense of $912,000, or an effective tax rate of (44.7)%, compared with an income tax benefit of $46,000, or an effective tax rate of 2.3%, for the three months ended September 30, 2024 and 2023, respectively. The effective tax rate for the three months ended September 30, 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.

Previous wording

General and Administrative. Our general and administrative expenses for the three months ended June 30, 2024 were $16,670,000, which represents an increase of $4,068,000, or 32.3%, from the three months ended June 30, 2023 of $12,602,000. This increase was primarily due to (i) $2,868,000 of increased severance during the three months ended June 30, 2024 due to headcount reductions in connection with our strategy to utilize our global footprint to enhance operating efficiencies and (ii) a loss of $950,000 during the three months ended June 30, 2024 compared with a gain $982,000 during the three months ended June 30, 2023 resulting from foreign currency exchange rates. These increases were partially offset by $815,000 of decreased general and administrative expenses at our offshore locations.

Current wording

General and Administrative. Our general and administrative expenses for the six months ended September 30, 2024 were $31,722,000, which represents an increase of $4,795,000, or 17.8%, from the six months ended September 30, 2023 of $26,927,000. This increase was primarily due to (i) $2,848,000 of increased severance during the six months ended September 30, 2024 due to headcount reductions in connection with our strategy to utilize our global footprint to enhance operating efficiencies and (ii) a loss of $1,726,000 during the six months ended September 30, 2024 compared with a gain $155,000 during the six months ended September 30, 2023 resulting from foreign currency exchange rates.

Previous 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.

Current wording

Foreign Exchange Impact of Lease Liabilities and Forward Contracts. Our foreign exchange impact of lease liabilities and forward contracts were non-cash losses of $16,506,000 and $490,000 for the six months ended September 30, 2024 and 2023, respectively. This change during the six months ended September 30, 2024 compared with the six months ended September 30, 2023 was primarily due to (i) the remeasurement of our foreign currency-denominated lease liabilities, which resulted in a non-cash loss of $9,687,000 compared with a non-cash gain of $1,822,000, respectively, due to foreign currency exchange rate fluctuations and (ii) the forward foreign currency exchange contracts, which resulted in non-cash losses of $6,819,000 and $2,312,000, respectively, due to the changes in their fair values.

Previous 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.

Current wording

Interest Expense, net. Our interest expense for the six months ended September 30, 2024 was $28,569,000, which represents an increase of $1,466,000, or 5.4%, from interest expense for the six months ended September 30, 2023 of $27,103,000. This increase was primarily due to increased collection of receivables utilizing accounts receivable discount programs resulting from higher sales partially offset by lower average outstanding balances under our credit facility and lower interest rates.

Previous 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.

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 $2,200,000 compared with a non-cash loss of $530,000 for the six months ended September 30, 2024 and 2023, respectively.

Previous 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.

Current wording

We had working capital (current assets minus current liabilities) of $154,260,000 and $156,034,000, a ratio of current assets to current liabilities of 1.4:1.0, at September 30, 2024 and March 31, 2024, respectively.

Previous wording

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.

Current wording

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.

Previous 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.

Current wording

Our primary source of liquidity was from cash generated from operations, the use of our receivable discount programs, and credit facility during the six months ended September 30, 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.

Previous 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.

Current wording

Net cash provided by operating activities was $2,011,000 compared with cash used in operating activities of $5,170,000 during the six months ended September 30, 2024 and 2023, respectively. The significant changes in our operating activities were due to our management of working capital, which included the reduction of inventory and increased collections of accounts receivable balances resulting from higher sales partially offset by the pay down of our accounts payable balances. Our accounts receivable balances were significantly higher in the prior year compared with the current year as we managed the use of accounts receivable discount programs in 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 $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.

Current wording

Net cash used in investing activities was $979,000 and $108,000 during the six months ended September 30, 2024 and 2023, respectively. The change in our investing activities primarily resulted from increased capital expenditures.

Previous 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.

Current wording

Net cash used in financing activities was $4,365,000 compared with cash provided by financing activities of $4,008,000 during the six months ended September 30, 2024 and 2023, respectively. The change in our financing activities primarily resulted from net repayments in the current year compared with net borrowings in the prior year 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”). 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.

Current wording

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.

Previous 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.

Current wording

We had $124,691,000 and $128,000,000 outstanding under the Revolving Facility at September 30, 2024 and March 31, 2024, respectively. In addition, $7,047,000 was outstanding for letters of credit at September 30, 2024. At September 30, 2024, after certain contractual adjustments, $94,330,000 was available under the Revolving Facility. The interest rate on our Revolving Facility was 8.17% and 8.43%, at September 30, 2024 and March 31, 2024, respectively.

Previous 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.

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 six months ended September 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. 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.

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. 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 September 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 September 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 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.

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 September 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 $6,400,000 and $9,800,000, and an asset of $1,190,000 and $2,390,000 at September 30, 2024 and March 31, 2024, respectively. During the three months ended September 30, 2024 and 2023, we recorded losses of $380,000 and $390,000, respectively, as the change in fair value of the Compound Net Derivative Liability in the condensed consolidated statement of operations. During the six months ended September 30, 2024 and 2023, we recorded a gain of $2,200,000 and a loss of $530,000, 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.

Previous 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.

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 September 30, 2024, $15,000,000 of commitments from participating financial institutions is 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 September 30, 2024, we had $26,487,000 of outstanding supplier obligations confirmed as valid under this program, included in accounts payable and accrued liabilities in the condensed consolidated balance sheet.

Previous 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.

Current wording

Our total capital expenditures were $1,219,000 and $315,000 for six months ended September 30, 2024 and 2023, respectively. These capital expenditures include (i) cash paid for the purchase of plant and equipment, (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.

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 for the three months ended June 30, 2024 and 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 and $162,000 for the three and six months ended September 30, 2024 and 2023.

Previous wording

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.

Current wording

In October 2023, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“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.